**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**FORM 10-K**

----

| **x** | **ANNUAL REPORT PURSUANT TO SECTION 13 or  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended September 30, 2006**

**Commissionfile number 000-51468**

**OR**

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 

**Forthe transition periodfrom                      to                      **

**MWIVETERINARY SUPPLY, INC.**

(Exactname of Registrant as specified in its Charter)

| **Delaware**                                |   | **02-0620757**                          |
|---------------------------------------------|--------|-----------------------------------------|
| (State or other jurisdiction)               |   | (I.R.S. Employer Identification Number) |
| **651 S. Stratford Drive,  Suite 100** |   | ** **                              |
| **Meridian, ID**                            |   | **83642**                               |
| (Address of principal executive offices)    |   | (Zip Code)                              |

 

| **(800)  824 3703**                                       |
|-----------------------------------------------------------|
| (Registrant’s telephone number, including area code) |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OFTHE SECURITIES EXCHANGE ACT OF 1934:

| **Title  of each class**      |   | **Name of Each Exchange on Which Registered** |
|-------------------------------|--------|-----------------------------------------------|
| Common Stock, $0.01 par value |   | Nasdaq                                        |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OFTHE SECURITIES EXCHANGE ACT OF 1934: **NONE**

Indicateby check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicateby check mark if the Registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934, as amended (the “Act”) during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past90 days. Yes x No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (17 CFR section 405) is not contained herein and will not becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):
| Large Accelerated Filer    o |   | Accelerated Filer  x |   | Non-Accelerated Filer  o |
|----------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o No x

Theaggregate market value of the voting stock held by non-affiliates of theRegistrant as of November 17, 2006 was $236,807,469. As of March 31,2006 (the last business day of the registrant’s most recently completed secondfiscal quarter), the aggregate market value of the voting stock held bynon-affiliates of the Registrant was $124,020,761. Shares of common stock heldby each executive officer and director and by each person who owns 10% or moreof our outstanding common stock have been excluded since such persons may bedeemed affiliates. This determination of affiliate status is not necessarily aconclusive determination for other purposes.

Thenumber of shares of the Registrant’s common stock, $0.01 par value, outstandingas of November 17, 2006 was 11,558,942.

**DocumentsIncorporated by Reference**

Listed hereunder are the documents, any portions ofwhich are incorporated by reference and the Parts of this Form 10-Kinto which such portions are incorporated:

1.                  The Registrant’s definitiveproxy statement for use in connection with the Annual Meeting of Stockholdersto be held on or about February 7, 2007 to be filed within 120 days afterthe Registrant’s fiscal year ended September 30, 2006, portions of whichare incorporated by reference into Part III of this Form 10-K.

 

----

**MWIVETERINARY SUPPLY, INC.FORM 10-KTABLE OF CONTENTS**
| Item       | ** **                                                                                                              | ** ** | ** ** | **Page** |
|------------|-------------------------------------------------------------------------------------------------------------------------|------------|------------|----------|
| ** ** | **PART I**                                                                                                         |       |       |     |
|       | Cautionary Statement                                                                                                    |       | 1          |     |
| 1.         | Business                                                                                                                |       | 1          |     |
| 1A.        | Risk  Factors                                                                                                           |       | 15         |     |
| 1B.        | Unresolved Staff Comments                                                                                               |       | 23         |     |
| 2.         | Properties                                                                                                              |       | 23         |     |
| 3.         | Legal  Proceedings                                                                                                      |       | 23         |     |
| 4.         | Submission of Matters to a Vote of Security Holders                                                                     |       | 23         |     |
| ** ** | **PART II**                                                                                                        |       |       |     |
| 5.         | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities |       | 24         |     |
| 6.         | Selected Financial Data                                                                                                 |       | 25         |     |
| 7.         | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                             |       | 27         |     |
| 7A.        | Quantitative and Qualitative Disclosures About Market  Risk                                                             |       | 42         |     |
| 8.         | Financial Statements and Supplementary Data                                                                             |       | 43         |     |
| 9.         | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                                   |       | 65         |     |
| 9A.        | Controls and Procedures                                                                                                 |       | 65         |     |
| 9B.        | Other  Information                                                                                                      |       | 68         |     |
| ** ** | **PART III**                                                                                                       |       |       |     |
| 10.        | Directors and Executive Officers of the Registrant                                                                      |       | 68         |     |
| 11.        | Executive Compensation                                                                                                  |       | 68         |     |
| 12.        | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       | 68         |     |
| 13.        | Certain Relationships and Related Transactions                                                                          |       | 68         |     |
| 14.        | Principal Accountant Fees and Services                                                                                  |       | 68         |     |
| ** ** | **PART IV**                                                                                                        |       |       |     |
| 15.        | Exhibits and Financial Statement Schedules                                                                              |       | 69         |     |
| SIGNATURES |                                                                                                                    | 70         |       |

 

 

----

**PART I**

***CautionaryStatement for Purposes of “Safe Harbor Provisions” of the Private SecuritiesLitigation Reform Act of 1995***

This annual report on Form 10-K containsforward-looking statements within the meaning of the federal securitieslaws. Statements that are not historical facts, including statements about ourbeliefs and expectations, are forward-looking statements. Forward-lookingstatements include statements preceded by, followed by or that include thewords “may,” “could,” “would,” “should,” “believe,” “expect,” “anticipate,” “plan,”“estimate,” “target,” “project,” “intend” and similar expressions. Thesestatements include, among others, statements regarding our expected businessoutlook, anticipated financial and operating results, our business strategy andmeans to implement our strategy, our objectives, the amount and timing ofcapital expenditures, the likelihood of our success in expanding our business,financing plans, budgets, working capital needs and sources of liquidity.

Forward-lookingstatements are only predictions and are not guarantees of performance. Thesestatements are based on our management’s beliefs and assumptions, which in turnare based on currently available information. Important assumptions relating tothe forward-looking statements include, among others assumptionsregarding demand for our products, the expansion of product offeringsgeographically or through new applications, the timing and cost of plannedcapital expenditures, competitive conditions and general economic conditions.These assumptions could prove inaccurate. Forward-looking statements alsoinvolve known and unknown risks and uncertainties, which could cause actualresults to differ materially from those contained in any forward-lookingstatement. Many of these factors are beyond our ability to control or predict.Such factors include, but are not limited to, the following:

·       vendor rebates based uponattaining certain growth goals;

·       changes in or availabilityof vendor rebate programs;

·       changes in the way vendorsintroduce products to market;

·       the recall of a significantproduct by one of our vendors;

·       extended shortage orbacklog of a significant product by one of our vendors;

·       seasonality;

·       the impact of generaleconomic trends on our business;

·       the timing andeffectiveness of marketing programs offered by our vendors;

·       the timing of theintroduction of new products and services by our vendors; and

·       competition.

Except as required byapplicable law, including the securities laws of the United States and the rules andregulations of the Securities and Exchange Commission, or SEC, we are under noobligation to publicly update or revise any forward-looking statements,whether as a result of any new information, future events or otherwise. Youshould not place undue reliance on our forward-looking statements. Although webelieve that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results or performance.

***Item 1.****                          Business.*

**General**

Our business commenced operations as part of aveterinary practice in 1976 and was incorporated as MWI Drug Supply, Inc.,an Idaho corporation, in 1980. MWI Drug Supply, Inc. was acquired by AgriBeef 

1

----

Co. in 1981. MWIVeterinary Supply Co. was incorporated as an independent subsidiary of AgriBeef Co. in September 1994. Effective June 18, 2002, MWI Holdings, Inc.was formed by Bruckmann, Rosser, Sherrill & Co. II, L.P. (“BRS”) forthe sole purpose of acquiring all of the outstanding stock of MWI VeterinarySupply Co. from Agri Beef Co. As a result of this transaction, MWI VeterinarySupply Co. became a wholly-owned subsidiary. On April 21, 2005, wechanged our name from MWI Holdings, Inc. to MWI Veterinary Supply, Inc.References in this report to “we,” “us,” “our,” and “MWI” refer to MWIVeterinary Supply, Inc. unless otherwise indicated.

We are a leading distributor of animal health productsto veterinarians across the United States. We distribute more than 10,000products sourced from over 400 vendors to more than 15,000 veterinary practicesnationwide from twelve strategically located distribution centers. Products wesell include pharmaceuticals, vaccines, parasiticides, diagnostics, capitalequipment, supplies, veterinary pet food and nutritional products. We marketthese products to veterinarians in both the companion animal and productionanimal markets. As of September 30, 2006, we had a sales force of 261people covering the United States. We also offer our customers a variety ofvalue-added services, including on-line ordering, pharmacy fulfillment,inventory management, equipment procurement consultation and special orderfulfillment, which we believe closely integrates us with our customers’day-to-day operations and provides them with meaningful incentives to continueordering from us.

Historically,approximately two-thirds of our total revenues have been generated from salesto the companion animal market and one-third from sales to the productionanimal market. For the fiscal years ended September 30, 2006, 2005 and2004, our total revenues were $606.2 million, $496.7 million, and $394.3million, respectively. Our operating income for the fiscal years ended September 30,2006, 2005 and 2004, was $23.7 million, $15.8 million and $12.6 million,respectively.

**Industry Overview**

According to the Animal Health Institute (“AHI”), anindustry group representing manufacturers of animal health products, animalhealth product sales in the United States for calendar year 2005 exceeded$5 billion for the first time, an increase of 6% over 2004. The market foranimal health products in the United States is split between products sold forcompanion and production animals. Companion animals include dogs, cats, otherpets and horses, while production animals include cattle and otherfood-producing animals. AHI estimates that companion animal products accountedfor 54% of the total market for animal health products in the United States incalendar year 2005.

We believe the companion animal health products marketis growing due to the increasing number of households with companion animals,an aging pet population, increased expenditures on animal health andpreventative care, advancements in pharmaceuticals and diagnostic testing andextensive marketing programs sponsored by companion animal nutrition andpharmaceutical companies. We believe that product sales in the productionanimal health products market are largely driven by continued spending onanimal health products to improve productivity, weight gain and diseaseprevention, as well as a growing focus on food safety. We believe that thesegrowth factors are mitigated by the downward influence of generic drugs onpricing.

Veterinarians are one ofthe primary purchasers of animal health products, particularly in the companionanimal market. As of December 31, 2005, according to the AmericanVeterinary Medical Association, or AVMA, there were more than 54,000veterinarians in private practice in more than 27,000 veterinary practicesnationwide. We believe that distributors play a vital role for veterinarypractices by providing access to a broad selection of products through a singlechannel and helping them efficiently manage their inventory levels.Distributors also offer product vendors substantial value by providingcost-effective access to a highly fragmented and geographically diversecustomer base.

2

----

**CompetitiveStrengths**

We believe that ourstrengths include:

·       *Leading Distributor to Veterinarians.  *Based upon ourtotal revenues for our fiscal year ended September 30, 2006, we are aleading animal health products distributor to veterinarians in the UnitedStates. While most of our products are available from several sources and ourcustomers typically have relationships with several distributors, we haveachieved this position primarily through internal growth and currently servemore than 15,000 of the more than 27,000 veterinary practices nationwide. Webelieve that our broad product offering, competitive pricing, superior customerservice, rapid product fulfillment and value-added services providemeaningful incentives for our customers to continue ordering from us.

·       *Leading Sales and Marketing Franchise.  *Our 261 salesrepresentatives educate customers on new veterinary products, assist in productselection and purchasing, and offer inventory management solutions. As of September 30,2006, we had 155 field sales personnel and 106 telesales representativescovering the United States. We also publish detailed product catalogs andmonthly magazines, which are often utilized by our customers as referencetools. While salespeople and printed materials are vital to our marketingstrategy, we also provide on-line ordering, valuable business information andvalue-added services through our Internet site, *www.mwivet.com*.For our fiscal year ended September 30, 2006, approximately 23% of ourproduct sales were generated through orders placed over the Internet.

·       *Strong,Established Relationships with Veterinarians and Vendors.  *Ourability to serve as a single source for most of our customers’ animal healthproduct needs has enabled us to develop strong and long-term customer relationships.Approximately 66% of our product sales for the fiscal year ended September 30,2006 were from customer accounts that were opened prior to fiscal year 2002 andapproximately 79% of our product sales for the fiscal year ended September 30,2006 were from customer accounts that were opened prior to fiscal year 2004.Independent veterinary practices have historically accounted for more than 80%of our product sales. In addition, for more than ten years we have maintaineddistribution arrangements with Banfield, The Pet Hospital (“Banfield”), thenation’s largest private veterinary practice, and with a non-controlledaffiliate, Feeders’ Advantage, L.L.C. (“Feeders’ Advantage”), a related partyand a buying group composed of several of the largest cattle feeders in theUnited States. Since we currently do not manufacture any of the products wesell, we are dependent on our vendors for the supply of our products. While ourvendors often have relationships with multiple distributors, many of our keyvendors including Fort Dodge, Schering-Plough and Vedco have been working withus for over ten years, while other key vendors including IDEXX Laboratories,Merial and Pfizer have more recently expanded their relationships with us. Webelieve our market position makes us an attractive partner for leading productvendors, since we provide cost-effective access to a significant portion of thehighly fragmented and geographically diverse veterinary market.

·       *Recurring Revenue Product Base.  *Over 95% of ourproduct sales for our fiscal years ended September 30, 2006, 2005 and 2004were from consumable medicines and supplies commonly required by veterinariansin their practice. Historically, this aspect of our business has resulted in arecurring stream of revenues.

·       *Sophisticated Technology and Information Systems.  *In2004, we successfully completed a comprehensive upgrade of our enterpriseinformation system, the central hub for all of our business processes. Thissystem supports order processing, inventory control, invoicing, shipping, salesanalysis and reporting, supply chain management and financial accounting. Webelieve that this system could support more than a doubling of our revenueswith minimal incremental investment.

3

----

·       *ExperiencedManagement Team.  *Wehave a strong and experienced senior management team with substantialanimal health industry expertise. The members of our senior management teamhave been with us for an average of over eleven years, and each member has demonstrateda commitment and capability to deliver growth in revenues and profitability.

**Business Strategy**

Our mission is to strengthen our position as a leadingnational animal health products distributor while continuing to efficientlydeliver substantial value and innovation to our customers, increase revenuesand improve profitability. Our strategy to achieve our mission is outlinedbelow.

*IncreaseSales to Existing Customers.*   Webelieve that veterinary practices typically purchase animal health productsfrom multiple distributors. For our fiscal year ended September 30, 2006,our average annual product sales per veterinary practice served wasapproximately $33,000. We intend to increase our share of these purchases byutilizing our proprietary customer database to focus our marketing efforts,expanding our sales force, selectively adding products to our portfolio andincreasing and expanding the value-added services we provide to our customers.By increasing the dollar value of purchases made by each customer as well astheir average order size, we intend to increase our profitability. Competitionfor hiring sales representatives who have existing customer relationships isintense and we focus on retaining our valued staff who have demonstrated theskills needed to successfully market our products and services. If we fail tohire or retain a sufficient number of qualified professionals, it couldadversely impact our business.

*ExpandBusiness Assistance Services for Veterinarians.**  *We intend to enhance our customerrelationships by expanding our business assistance services for veterinarians.These value-added services include among others our e-commerce platform, SweepTMin-clinic inventory management system, pharmacy fulfillment program, equipmentprocurement consultation and pet cremation service offerings. In addition, weare in the process of upgrading our Internet site, *www.mwivet.com*, in order to significantly enhance thee-commerce functionality available to our customers.

*Increasethe Total Number of Customers.**  *We believe we provide products andservices to more than 50% of all domestic veterinary practices. We intend toraise this percentage by increasing the number and productivity of our salesrepresentatives, selectively acquiring competitors and adding distributioncenters. We believe the greatest opportunities to add new customers are in theNortheastern, Midwestern and Southeastern regions of the United States, areaswhere we do not hold the leading market position. We believe it is important toincrease the total number of customers served in order to attain the growthgoals that are a feature of many of our vendors’ rebate programs. Changes toany vendor rebate program or our failure to achieve these growth goals may havea material effect on our gross profit and operating results in any givenquarter or year.

*ContinuouslySeek to Improve Operations.**  *We continuously evaluate opportunities to increasesales, lower costs and realize operating efficiencies. Current initiativesinclude investments in our databases and distribution center managementsystems. We also plan to pursue alternative product sourcing strategies andhave implemented a private label program on selected products to reduce ourprocurement costs and increase our profitability, while maintaining strongrelationships with key vendors.

*Make SelectiveAcquisitions.**  *TheU.S. market for animal health products distribution is highly fragmented, withnumerous national, regional and local distributors. Many of these companies aresmall, privately-held businesses, some of which may represent attractiveacquisition candidates. In fiscal year 2005, we acquired and integrated theoperations of Memorial Pet Care, Inc. and Vetpo Distributors, Inc. (“Vetpo”).On May 8, 2006, we acquired substantially all of the assets of NorthlandVeterinary Supply, Ltd. (“Northland”) and we integrated their business. Weintend to continue pursuing acquisitions that are consistent with our missionof enhancing value to our customers, increasing revenues and improving 

4

----

profitability,while strengthening our competitive position. Additionally, we may evaluateselective acquisitions of niche health care distribution and ancillarybusinesses that can benefit from our infrastructure, systems and expertise.

**Products**

In fiscal year 2006, wedistributed more than 10,000 products, including pharmaceuticals, vaccines,parasiticides, diagnostics, capital equipment, supplies, veterinary pet foodand nutritional products. For our fiscal year ended September 30, 2006,our product revenues were comprised of approximately 40% pharmaceuticalproducts, 19% vaccine products, 7% parasiticide products, 8% diagnosticproducts, 3% capital equipment products and 23% of other supplies. In addition,we sell over 600 products under agency agreements with our vendors. Under anagency agreement, we typically solicit orders and provide customer service fora commission, while the vendor stocks and ships the products. We also haveavailable on special order over 7,000 products that we do not normally stock inour warehouses. We continually seek to update and improve the range of productswe offer to address our customer requirements. Over 95% of our product salesfor our fiscal years ended September 30, 2006, 2005 and 2004 were from thesale of consumable medicines and supplies commonly required by veterinarians intheir practice. Historically, this aspect of our business has resulted in arecurring stream of revenues.

***Pharmaceuticals, Vaccines and Parasiticides***

We offer our customers avariety of pharmaceuticals, vaccines and parasiticides. Our pharmaceuticalproducts typically include anesthetics, analgesics, antibiotics, ophthalmicsand hormones. Our vaccine products are primarily comprised of small animal,equine and production animal biologicals. Our parasiticides are used forcontrol of fleas, ticks, flies, mosquitoes and internal parasites.

***Diagnostics, Capital Equipment and Supplies***

We offer a wide range ofdiagnostics, capital equipment and supplies to veterinarians. Diagnostic salestypically include consumable in-clinic tests for detecting heartworm, lyme,feline leukemia and parvovirus, as well as consumable products for measuringblood chemistry, electrolyte balance and cell counts. Our capital equipmentsales include anesthesia machines, surgical monitors, diagnostic equipment,dental machines, cages, lights and x-ray machines. We employ a team of capitalequipment specialists to analyze the latest technologies and recommendequipment that meets our customers’ specific needs. Additionally, our capitalequipment specialists provide training on our capital equipment lines to ourcustomers and our sales force. Our sales of supplies include syringes,instruments, bandages, IV products, surgical consumables, grooming materialsand other small equipment items used by veterinary practices.

***Veterinary Pet Food and Nutritional Products***

We offer our customers abroad selection of veterinary pet foods and nutritional products. We considerveterinary pet food to consist of two categories: foods for specialty diets andpremium pet foods. Specialty diets are recommended by veterinarians to addressspecific medical and nutritional needs. Premium pet foods are recommended byveterinarians to promote optimal nutrition in healthy animals. Pet foods aretypically sold under agency agreements. Nutritional products include dietarysupplements, vitamins, dental chews and specialty treats which either helpaddress specific medical conditions or are compatible with recommendednutritional guidelines.

5

----

**Value-AddedServices**

Weoffer our customers a variety of value-added services, which we believeclosely integrate us with our customers’ day-to-day operations and provide themwith meaningful incentives to continue ordering from us. These services includethe following:

| Service                             | ** ** | ** **                                                                                                                                                                                               | ** ** | **Description** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| E-commerce  platform                |       | On-line ordering  system that provides information to veterinary practices on products, vendor  programs and purchasing history                                                                          |
| Pharmacy fulfillment                |       | Shipment of  prescription animal health products to end-users on behalf of  veterinarians from our three licensed pharmacies located in Grand Prairie,  Texas, Harrisburg, Pennsylvania and Nampa, Idaho |
| Inventory management  system        |       | Flexible system  that facilitates counting, maintaining and ordering inventory in veterinary  practices                                                                                                  |
| Equipment procurement  consultation |       | Consultation,  demonstrations and training provided by our dedicated capital equipment  specialists                                                                                                      |
| Special order  fulfillment          |       | Procurement and  shipment of over 7,000 unique products that we do not normally stock in our  warehouses                                                                                                 |
| Educational seminars                |       | Seminars for our  customers covering business and medical topics, frequently sponsored in  conjunction with our vendors                                                                                  |
| Pet cremation                       |       | Business units presently  operating in Idaho and Wisconsin that serve veterinary practices and their  clients by providing cremation services                                                            |

 

**Customers**

We currently serve more than 15,000 of the more than27,000 veterinary practices located throughout the United States. Theseveterinary practices are typically small, privately-held businesses that webelieve place at least one order per week to avoid storing and managing largevolumes of supplies. We believe that these veterinary practices usuallypurchase animal health products from multiple distributors. We seek to be theprincipal provider of animal health products to our customer base.

We maintain a diverse and stable customer base.Independent veterinary practices have historically accounted for more than 80%of our product sales. Also, for more than ten years, we have maintaineddistribution arrangements with Banfield, the nation’s largest privateveterinary practice with over 500 veterinary hospitals, and ournon-controlled affiliate, Feeders’ Advantage, a buying group composed ofseveral of the largest cattle feeders in the United States. Banfield accountedfor approximately 10% of our product sales for our fiscal years ended September 30,2006, 2005 and 2004. Feeders’ Advantage accounted for approximately 6% of ourproduct sales for our fiscal years ended September 30, 2006, 2005, and2004. The loss of Banfield or Feeders’ Advantage or deterioration in ourrelations with either of them could significantly affect our financialcondition and results of operations. Our ten largest customers, excludingBanfield and Feeders’ Advantage, accounted for approximately 5% of our productsales for our fiscal years ended September 30, 2006 and 2005, and 7% ofour product sales for our fiscal year ended September 30, 2004, with nosingle customer representing more than 1% of our product sales for those years.We typically do not enter into long-term contracts with our independentveterinary customers.

6

----

We are a party to twowritten agreements with Banfield, an Agreement for Product Purchases and anAgreement for Logistics Services. These agreements govern the pricing, shippingand other terms and conditions under which we sell our products and provide servicesto Banfield. Under the Agreement for Product Purchases, we provide a limitedwarranty with respect to all goods sold by us and paid for by Banfield thatgood title to the products is conveyed, that the products are delivered free ofany security interest, that the products will conform to the description, gradeand condition of the products invoiced and that all products will be free ofany defects arising while the products are either in our possession or controlor in the control of any carrier transporting the goods from us to Banfield. Weare also required to maintain insurance in an amount equal to at least thereplacement cost of all property that is purchased by Banfield from thirdparties and is held by us on their behalf.

**Sales and Marketing**

Our sales andmarketing strategies are designed to establish and maintain strong customerrelationships through personal visits by field sales representatives, frequenttelesales contact and direct marketing, emphasizing our broad product lines,competitive pricing, efficient ordering capabilities, high levels of customersupport and service and other value-added services. The key elements ofour sales and marketing strategy are:

·       *Field Sales Representatives:  *Our sales force is a keycomponent of our value-added approach. Due to the fragmented nature of theanimal health products market, we believe that a large sales force is vital toeffectively support existing customers and target potential customers. As of September 30,2006, we had 155 field sales personnel, covering most of the United States. Ourfield sales representatives educate customers on new veterinary products,assist in product selection and purchasing and offer inventory managementsolutions. Once a field sales representative has established a relationshipwith a customer, the field sales representative encourages the customer to useour telesales representatives and online ordering capabilities for day-to-daycustomer needs. Field sales representatives work under the supervision ofregional sales managers within an assigned sales territory to ensure effectivecommunication and timely sales calls with customers. Our field salesrepresentatives complement our telesales and direct marketing efforts andenable us to better market, service and support the sale of our products andservices. Our field sales representatives are employees of our company and arecompensated with a combination of salaries and commissions.

·       *Telesales:**  *We support our field salesrepresentatives and direct marketing efforts with telesales representatives inseven call centers covering the United States. As of September 30, 2006,we had 106 telesales representatives. Telesales representatives work aspartners with our field sales representatives, providing a dual coverageapproach for individual customers. Telesales representatives process orders andgenerate new sales through frequent and direct contact with customers.Telesales representatives are responsible for assisting customers withordering, purchasing decisions and general questions. Telesales representativesutilize our customized order entry system to process customer orders, accesspricing, availability and promotional information about products, and researchcustomer preferences and order history. Our seven call centers are connected byour telecommunications system which enables them to operate as one virtual call center.

·       *DirectMarketing:**  *Wemarket to existing and potential customers by distributing product catalogs andmonthly magazines. We publish our comprehensive animal health products catalogevery other year. This catalog contains over 8,000 SKUs, includes detaileddescriptions and specifications of our products and is often used as areference tool by our customers and sales force. We also promote our productsand services in our monthly magazine, the *Messenger*,which our field sales representatives use as a tool to educate customers onproduct and vendor programs. Additional marketing tools that we utilize includespecialty catalogs, customer loyalty programs, specific 

7

----

product and vendorprograms, flyers, faxes, order stuffers and other promotional materials. Forthe fiscal year ended September 30, 2006, we distributed nearly 450,000pieces of direct marketing materials to existing and potential customers. Wealso participate in national and regional trade shows to extend our customerreach and enhance customer interaction.

·       *E-BusinessPlatform:**  *Weprovide on-line ordering, valuable business information and value-addedservices to veterinarians via our primary Internet site, *www.mwivet.com*,and customized Internet sites that we maintain for two of our largestcustomers. Customers can use our Internet sites to order products, learn moreabout products and vendor programs, print forms needed for their veterinarypractice, review their historical purchases and manage their inventory. For ourfiscal years ended September 30, 2006, 2005 and 2004, approximately 23%,21%, and 18%, respectively, of our product sales were generated through ordersplaced over the Internet.

**Product Sourcing**

We currently distribute more than 10,000 productssourced from more than 400 vendors, including most major vendors of animalhealth products that sell through distributors. We believe that we are aleading distributor for many of these vendors.

We currently do not manufacture any of our productsand are dependent on vendors for our supply of products. We believe thateffective purchasing is a key factor in maintaining our position as a leadingprovider of animal health care products. We regularly assess our purchasingneeds and our vendors’ product offerings and prices to obtain products atfavorable prices. While we purchase products from many vendors and there isgenerally more than one vendor for most animal health product categories, ourconcentration of aggregate purchases with key vendors is significant. Our topthree vendors, Fort Dodge, Pfizer and Vedco, supplied products that accountedfor approximately 44% of our revenues for the fiscal year ended September 30,2006 and approximately 45% of our revenues for our fiscal years ended September 30,2005 and 2004. Our ten largest vendors accounted for approximately 70%, 73% and72% of our revenues for the fiscal years ended September 30, 2006, 2005,and 2004, respectively.

There are two major types of transactions that canaffect the flow of our products from our vendors, through us, to our customers.The method of selling products to veterinarians is dictated by our vendors.Traditional “buy/sell” transactions, which account for the vast majority of ourbusiness, involve the direct purchase of products by us from vendors, which wemanage and store in our warehouses. A customer then places an order withus, and the order is then picked, packed, shipped and invoiced by us to ourcustomer, followed by payment from our customer to us.

We also sell certain product lines to our customersunder agency agreements with some of our vendors. Under this model, when wereceive orders for products from the customer, we transmit the order to thevendor who then picks, packs and ships the products. In some cases our vendorinvoices and collects payment from our customer, while in other cases weinvoice and collect payment from our customer. We receive a commission paymentfor soliciting the order and for providing other customer service activities.Our operating expenses associated with agency sales transactions are lower thanin traditional “buy/sell” transactions.

We have written agreements with approximately 30 ofour vendors, including Fort Dodge and Pfizer. Our distribution agreement withFort Dodge provides that we shall act as a distributor of Fort Dodge products inthe United States on a non-exclusive basis. Fort Dodge may reduce the size ofour territory upon 30 days written notice. We are required to activelypromote and solicit sales of Fort Dodge products and to include their productsin our regular sales promotions. In return, we are entitled to participate inFort Dodge’s current distributor incentive program. Fort Dodge is required toindemnify us against any claims alleging that the Fort Dodge products aredefective, except in certain limited situations. We are required to maintainsufficient inventory of each Fort Dodge product to meet our anticipated demandand 

8

----

to store the products inaccordance with their respective label instructions. Our distribution agreementwith Fort Dodge had an original term that expired on December 31, 2004 butthe agreement automatically renews for additional periods of one year. Theagreement may be terminated by either party with or without cause upon90 days prior written notice.

Our livestock products agreement with Pfizer providesthat we shall supply selected customers in the cattle and swine fields withPfizer products. In return, we are entitled to certain service fees andrebates. We are required to maintain sufficient inventory to meet ouranticipated demand on a monthly basis and to store the Pfizer products inaccordance with their respective label instructions. Pfizer also reserves theright to sell directly to our customers or any other party. The livestockproducts agreement has a one year term that expires on December 31, 2006.

Animal health product vendors typically implementsales promotions for products distributed to veterinarians that can affect thetiming in which we recognize revenues. In addition, at the time we negotiatevendor agreements for the upcoming year, our vendors typically establish salesgrowth goals for us to meet in order to receive performance rebates. Thesegrowth goals are generally based on quarterly, trimester, semi-annual or annualtargets.

Product returns from ourcustomers and to our vendors occur in the ordinary course of business. Weextend our customers the same return of goods policies as are extended to us byour vendors. We do not believe that our operations will be adversely impacteddue to the return of products.

**Information Systems**

In 2004, we successfullycompleted a comprehensive upgrade of our enterprise information system, thecentral hub for all of our business processes. Our information systems enablethe centralized management of key functions, including accounts receivable, inventorymanagement, accounts payable, purchasing, sales and order fulfillment, and thegeneral ledger interface for payroll. These systems allow us to efficientlymanage our growth, deliver superior customer service, effectively targetcustomers, manage financial performance and monitor daily operationalstatistics.

**Distribution**

As of September 30,2006, we distributed our products from twelve strategically locateddistribution centers throughout the United States. In our fiscal year ended September 30,2006, we opened our twelfth distribution center located in Orlando, Florida;expanded operations in Denver, Colorado, moving to a new distribution and callcenter; and expanded our existing distribution center in Harrisburg,Pennsylvania. Once a customer’s order is entered into our customized orderentry system, it is electronically transmitted to the distribution center thatcarries the product and is closest to the customer’s location. Followingreceipt of the order, a document is printed in the warehouse which reflects thebin location of the product to facilitate product fulfillment. The order isthen packaged and shipped along with an itemized invoice. We maintain inventorylevels in our warehouses appropriate to satisfy customer demand for prompt deliveryand fulfillment of their product orders. Inventory levels are managed on adaily basis through our information systems. In order to meet the rapiddelivery requirements of our customers, we offer next-day delivery service onmost of the products we stock in our warehouses. We estimate that as of September 30,2006, we shipped same day from our warehouses approximately 98% of the dollarvalue of orders placed by our customers. We currently ship the majority of ourorders through United Parcel Service, Inc., or UPS, with the balance ofour orders being shipped by our own delivery trucks, regional carriers andother national carriers.

9

----

**Acquisitions**

In November 2004, we acquired certain assets ofMemorial Pet Care, Inc., a pet crematorium located in Meridian, Idaho.Memorial Pet Care presently operates in southwest Idaho and eastern Oregon andserves veterinary practices and their clients by providing cremation services.

In January 2005, we acquired substantially all ofthe assets of Vetpo Distributors, Inc., (“Vetpo”), a regional animalhealth products distributor located in Holland, Michigan. This acquisition hasenabled us to substantially expand our market presence and improve ourdistribution capabilities in Michigan, Illinois, Indiana, Ohio and Wisconsin.

On May 8, 2006, weacquired substantially all of the assets of Northland Veterinary Supply, Ltd.,(“Northland”). Northland presently operates in Clear Lake, Wisconsin and is adistributor of animal health products to approximately 500 veterinary practicesand producers across the Midwestern United States.

**Competition**

The distributionand manufacture of animal health products is highly competitive. We competewith numerous vendors and distributors based on customer relationships, serviceand delivery, product selection, price and e-business capabilities. Most of ourproducts are available from several sources, including other distributors andvendors, and our customers tend to have relationships with severaldistributors. In addition, our competitors could obtain exclusive rights todistribute certain products, eliminating our ability to distribute thoseproducts. Consolidation in the veterinary distribution business could result inexisting competitors increasing their market share, which could give them greaterpricing power, decrease our revenues and profitability, and increase thecompetition for customers. Our primary competitors, excluding vendors, includethe following:

·       Butler Animal HealthSupply;

·       Henry Schein, Inc.;

·       Lextron Animal Health, Inc.;

·       Professional Veterinary Products, Ltd.;

·       Vet Pharm, Inc.;

·       Animal Health International, Inc.(formerly Walco International, Inc.)

·       Webster Veterinary Supply,a division of Patterson Companies, Inc.; and

·       other national, regional,local and specialty distributors.

The role of the animal health product distributor haschanged dramatically during the last decade. Successful distributors areincreasingly providing value-added services in addition to the productsthey traditionally provided. We believe that to remain competitive we mustcontinue to add value to the distribution channel, while removing unnecessarycosts associated with product movement.

Distribution of animalhealth products is characterized by either “ethical” or “over-the counter,”commonly referred to as OTC, channels of product movement. Ethical distributionis defined as those sales of goods to licensed veterinarians for use in theirprofessional practice. Many of these products are prescription and must be soldor prescribed by a licensed professional. OTC distribution is the movement ofgoods to the animal owner and the end-user. Many of these products alsoare purchased by the licensed veterinarian for professional use or for resaleto their client. There are numerous ethical and OTC distribution companiesoperating throughout the United States and competition in the veterinarydistribution industry is intense.

10

----

**Trademarks**

We have registered withthe United States Patent and Trademark Office the marks “MWI,” “MWI Design” and“MWIVET.com,” and we have filed applications to register the marks “VETONE” and“VETRIMEC.” We believe that the MWI mark is well recognized in the animalhealth products industry and by veterinarians and is therefore a valuable assetof ours.

**Employees**

As of September 30,2006, we had 719 employees across the United States. We have not experienced ashortage of qualified personnel in the past, and believe that we will be ableto attract such employees in the future. None of our employees are a party to acollective bargaining agreement, and we consider our relations with ouremployees to be good.

**Website**

Our website address is *www.mwivet.com* and can be used to access, free of charge,through the investor relations category, our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and any amendments to those reports, as soon as reasonably practicable after weelectronically file such material with or furnish it to the SEC. Theinformation on our website is not incorporated as a part of this annual report.The public can also obtain copies of these reports by visiting the SEC’s PublicReference Room at 100 F Street, NE, Washington DC 20549, or by calling theSEC at 1-800-SEC-0330, or by accessing the SEC’s website athttp://www.sec.gov.

**GovernmentalRegulation**

Our vendors of pharmaceuticals, vaccines,parasiticides and certain controlled substances are typically regulated byfederal agencies, such as the Food and Drug Administration (“FDA”), the UnitedStates Department of Agriculture (“USDA”), the Environmental Protection Agency(“EPA”), and the Drug Enforcement Agency (“DEA”), as well as most similar stateagencies. Therefore, we are subject, either directly or indirectly, toregulation by the same agencies. Most states and the DEA require us to beregistered or otherwise keep a current permit or license to handle controlledsubstances. Manufacturers of vaccines are required by the USDA to comply withvarious storage and shipping criteria and requirements for vaccines. To theextent we distribute such products, we must comply with the same requirements,including, without limitation, the storage and shipping requirements forvaccines.

Most state boards of pharmacy require us to belicensed in their respective states for the sale of pharmaceutical products andmedical devices within their jurisdictions. As a distributor of prescriptionpharmaceutical products, we are subject to the Prescription Drug Marketing Act(“PDMA”). The PDMA provides governance and authority to the states to provide minimumstandards, terms and conditions for the licensing by state licensingauthorities of persons who “engage” in wholesale distribution (as defined byeach state regulatory agency) in interstate commerce of prescription drugs.With this authority, states require site-specific registrations for the partiesthat engage in the selling and/or physical distribution of pharmaceuticalproducts into their state in the form of out-of-state registrations. 

Effective December 1, 2006, the federal drugpedigree requirements of the FDA under the PDMA will go into effect. Thefederal pedigree regulations require tracking human labeled prescriptionproducts through the entire distribution chain and are applicable todistributors that do not have a written agreement with the manufacturergranting the wholesale distributor status as an “Authorized Distributor ofRecord.” Selling and/or distributing products without the appropriateregistrations may subject us to fines, penalties, misdemeanor or felonyconvictions, and/or seizure of the products involved. We have a Manager ofRegulatory Compliance and have engaged outside consultants as needed to assistus in meeting and complying with the various state and federal licensurerequirements to which we are subject.

11

----

Our pet cremation business is subject to state andlocal zoning laws, and we are required to maintain permits for the constructionand operation of an animal incineration device. We are also required to have anair pollution permit in connection with the operation of our pet cremationbusiness.

Some states (as well ascertain cities and counties) require us to collect sales taxes/use taxes oncertain types of animal products. We are also subject to laws governing ourrelationship with employees, including minimum wage requirements, overtime,working conditions and citizenship requirements. In addition, we are subject toadditional regulations regarding our hiring practices because several federal,state and local governmental agencies are our customers.

**Environmental Considerations**

We do not currentlymanufacture or alter in any way the composition of products that we distribute.All products are distributed in compliance with the relevant rules andregulations as approved by various state and federal agencies.

**Executive Officers**

Thefollowing table sets forth the names, ages and titles, as well as a briefaccount of the business experience, of each person who was an executive officerof the Company as of September 30, 2006:

| **Name**                   | ** ** | ** ** | ** ** | **Age**                                                                       | ** ** | **Title** |
|----------------------------|------------|------------|------------|-------------------------------------------------------------------------------|------------|-----------|
| James F.  Cleary, Jr. |       | 43         |       | Board Director,  President and Chief Executive Officer                        |
| Mary Patricia B.  Thompson |       | 43         |       | Senior Vice President of  Finance and Administration, Chief Financial Officer |
| James W. Culpepper         |       | 52         |       | Vice President of  Inventory Management                                       |
| Jeffrey J. Danielson       |       | 46         |       | Vice President of Sales                                                       |
| John J. Francis            |       | 53         |       | Vice President and  General Manager of Specialty Resources Group              |
| James S. Hay               |       | 63         |       | Vice President and Chief  Information Officer                                 |
| Bryan P. Mooney            |       | 38         |       | Vice President of  Operations                                                 |
| James M. Ross              |       | 57         |       | Vice President of  Business Development                                       |
| John R. Ryan               |       | 37         |       | Vice President of  Marketing                                                  |

 

***James F. Cleary, Jr.***has served as President since March 2000 andChief Executive Officer since June 2002. Mr. Cleary has also been amember of the board of directors since June 2002. He joined MWI in January 1998as Director of National Accounts and was promoted to Vice President of DemandGeneration in 1999. Mr. Cleary was Vice President of Agri Beef Co., MWI’sformer parent, from 1996 to 1998. From 1990 to 1996, Mr. Cleary wasemployed in management positions with Morrison Knudsen Corporation and itsaffiliate MK Rail Corporation. Mr. Cleary graduated from Dartmouth Collegein 1985 with a Bachelor of Arts in Economics and received his Masters ofBusiness Administration from Harvard Business School in 1990. Mr. Clearyis also a member of the board of directors of Agri Beef Co. and SeroyalHoldings, L.P., and a manager of Feeders’ Advantage, L.L.C. Mr. Cleary isthe brother-in-law of Mr. Robert Rebholtz, one of our board directors.

***Mary Patricia B.Thompson***has served as Senior Vice President ofFinance and Administration, Chief Financial Officer since August 2006,with oversight of finance, regulatory compliance, inventory management,information technology, and human resources. Prior to August, Ms. Thompsonhad been the Vice President, Secretary and Chief Financial Officer since June 2002.Ms. Thompson joined Agri Beef Co. in 1989 as the Feedlot and CommodityDivision Controller. In September 1991, Ms. Thompson was promoted to Controllerof MWI Veterinary Supply Co., then a wholly-owned subsidiary of Agri Beef Co.Prior to joining Agri Beef Co., Ms. Thompson worked for Arthur AndersenLLP from 1985 to 1989, where 

12

----

she provided auditing andaccounting services. Ms. Thompson graduated from the University of Idahoin 1985, summa cum laude, with a Bachelor of Science in Accounting. Ms. Thompsonis a licensed Certified Public Accountant. Ms. Thompson is also a memberof the board of directors of the American Veterinary Distributors Association.

***James W. Culpepper***hasserved as Director of Inventory Management (now Vice President of InventoryManagement) since 1998. Mr. Culpepper joined MWI in 1997 as GeneralMerchandise Manager. Prior to joining MWI, Mr. Culpepper worked forPayless Drug Stores for 20 years. During that period, Mr. Culpepperheld various positions, including pharmacist, merchandiser and buyer ofpharmaceutical supplies, and Inventory Control Manager. Mr. Culpepper graduatedfrom Oregon State University’s School of Pharmacy in 1977.

***Jeffrey J.Danielson***has served as Director of Sales (nowVice President of Sales) since 2001. Mr. Danielson joined MWI VeterinarySupply Co. in 1985 as an Outside Sales Representative, serving the state ofWashington. From 1989 to 1991, Mr. Danielson served as Assistant SalesManager and from 1991 to 2001 served as National Sales Manager. Mr. Danielsongraduated from Colorado State University in 1983 with a Bachelor of Science inAgricultural Business.

***John J. Francis***has served as Vice President and General Manager of Specialty Resources Group sinceSeptember 28, 2006. Prior to joining MWI, Mr. Francis worked forWebster Veterinary Supply (an animal health distributor) as the Vice Presidentof Sales from April 2004 to September 2006. Mr. Francis was theKey Account Manager of Excel, a division of Cargill, Inc., fromJune 2002 to April 2004 and was the Vice President of Sales forFuture Beef based in Parker, Colorado, from May 2000 to May 2002.From 1990 until 2000, Mr. Francis served as General Manager and thenPresident of MWI Veterinary Supply Co. Mr. Francis graduated from MichiganState University in 1975 with a Bachelor of Science in Animal Husbandry andholds a Master of Science in Animal Science obtained in 1977 from theUniversity of Illinois.

***James S. Hay***hasserved as Chief Information Officer (now Vice President and Chief InformationOfficer) since September 2002. Mr. Hay joined Agri Beef Co. in 1996as Vice President of Information Systems. Prior to joining Agri Beef Co.,Mr. Hay served as Director of Management Information Systems at NaturalWonders Inc. from 1991 to 1995; Director of Management Information Systemsat the Oakland Tribune from 1989 to 1991; Vice President and Chief InformationOfficer of Liquor Barn, Inc. from 1987 to 1989; Director of InformationServices at Genstar Corporation from 1974 to 1987; management consultant atPrice Waterhouse from 1968 to 1974; and as a systems engineer at IBMCorporation from 1965 to 1968. Mr. Hay graduated from the University ofManitoba in 1965 with a Bachelor of Science in Mathematics and Physics.

***Bryan P. Mooney***hasserved as Director of Operations (now Vice President of Operations) since May 2005.Mr. Mooney joined MWI in January 1994 as the Operations Manager ofour Denver, Colorado distribution operation and served in that capacity until May 1998.From May 1998 until February 2005, Mr. Mooney served as Managerof Transportation and Logistics and from January 2005 until May 2005as the Western Regional Operations Manager. Mr. Mooney graduated from theUniversity of Wyoming in 1991 with a Bachelor of Science in AgriculturalBusiness.

***James M. Ross***hasserved as Director of Banfield Accounts (now Vice President of BusinessDevelopment) since April 2001 and as Director of Business Developmentsince 2003. Prior to joining MWI, Mr. Ross worked for 32 years in thehuman medical supply distribution industry, where Mr. Ross served as anoperations manager for Intermountain Surgical Supply of Boise, Idaho from 1970to 1972 and as Account Manager from 1972 to 1976; as Branch Manager and GeneralManager of Intermedco, Inc.’s Oklahoma operations from 1976 to 1985; asVice President, West Region Manager of Durr-Fillauer Medical ofMontgomery, Alabama from 1985 to 1996; and as Vice President of Operations forBergen Brunswig Medical Corporation, a Division of Bergen Brunswig Corporationin Orange, California from 

13

----

1996 to 1998. In 1999, Mr. Rossbecame Executive Vice President of Sales and Distribution and in December 1999assumed the additional position of Chief Operating Officer of Bergen BrunswigMedical Corporation and served in those positions until September 2000.From January 2001 until April 2001, Mr. Ross served as VicePresident, General Manager of Columbia Diagnostics, a division of FisherScientific. Mr. Ross graduated from Boise State University in 1972 with aBachelor of Science in Business Administration.

***John R. Ryan***hasserved as Director of Marketing & Analysis (now Vice President ofMarketing) since 2000. Mr. Ryan joined MWI in June 1995 as an OutsideSales Representative and served in such capacity until June 2000. Prior tojoining MWI, Mr. Ryan worked for the Virbac Corporation (a companionanimal pharmaceutical company) as a Territory Manager from 1993 to 1995. Mr. Ryangraduated from the University of California, Davis in 1993 with a Bachelor ofScience in Animal Physiology.

14

----

***Item 1A.****                  RiskFactors.*

*In addition to the factors discussed elsewhere in thisForm 10-K, the following are important factors which could causeactual results or events to differ materially from those contained in anyforward-looking statements made by or on behalf of the Company.*

**Our operatingresults may fluctuate due to factors outside of management’s control.**

Our future revenuesand results of operations may significantly fluctuate due to a combination offactors, many of which are outside of management’s control. The most notable ofthese factors include:

·       vendor rebates based uponattaining certain growth goals;

·       changes in or availabilityof vendor rebate programs;

·       changes in the way vendorsintroduce products to market;

·       the recall of a significantproduct by one of our vendors;

·       extended shortage orbackorder of a significant product by one of our vendors;

·       seasonality;

·       the impact of generaleconomic trends on our business;

·       the timing andeffectiveness of marketing programs offered by our vendors;

·       the timing of theintroduction of new products and services by our vendors; and

·       competition.

These factors couldadversely impact our results of operations and financial condition. We may beunable to reduce operating expenses quickly enough to offset any unexpectedshortfall in revenues or gross profit. If we have a shortfall in revenues orgross profit without a corresponding reduction to expenses, operating resultsmay suffer. Our operating results for any particular fiscal year or quarter maynot be indicative of future operating results. You should not rely onyear-to-year or quarter-to-quarter comparisons of results of operations as anindication of our future performance.

**An adverse changein vendor rebates could negatively affect our business.**

The terms on which we purchase or sell products frommany vendors of animal health products entitle us to receive a rebate based onthe attainment of certain growth goals. Vendors may adversely change the termsof some or all of these rebate programs. Because the amount of rebates we earnis directly related to the attainment of pre-determined sales growth goals, andbecause the nature of the rebate programs and the amount of rebates availableare determined by the vendors, there can be no assurance as to the amount ofrebates that we will earn in any given year. Historically, we have beensuccessful in achieving most rebate growth goals and have not experienced anymaterial adverse impact on our results of operations and financial conditiondue to a change in a rebate program. Changes to any rebate program initiated byour vendors may have a material effect on our gross profit and our operatingresults in any given quarter or year. Vendors may reduce the amount of rebatesoffered under their programs, or increase the growth goals or other conditionswe must meet to earn rebates to levels that we cannot achieve. During calendaryear 2006, certain of our vendors modified their rebate programs with us. Theserebate program modifications changed the revenue growth targets fromannual-weighted calendar year targets to either quarterly or trimester growthtargets. These modifications resulted in rebates previously expected to beearned and recognized in our first fiscal quarter 2007 ending on December 31,2006 to be recognized in our fiscal year 2006.

15

----

Additionally, factorsoutside of our control, such as customer preferences or vendor supply issues,can have a material impact on our ability to achieve the growth goalsestablished by our vendors, which may reduce the amount of rebates we receive.The occurrence of any of these events could have an adverse impact on ourresults of operations.

**Ourquarterly operating results may fluctuate significantly, and these fluctuationsmay cause our stockprice to fall.**

Our quarterly revenues andoperating results have varied significantly in the past, and may continue to doso in the future. While we accrue rebates from vendors as they are earned, ourrebates have historically been highest during the quarter ended December 31,since most of our vendors’ rebate programs were designed to include targets tobe achieved during the calendar year. During calendar year 2006, certain of ourvendors modified their rebate programs with us. These rebate programmodifications changed the revenue growth targets from annual-weighted calendaryear targets to either quarterly or trimester growth targets. Thesemodifications resulted in rebates previously expected to be earned andrecognized in our first fiscal quarter 2007 ending on December 31, 2006 tobe recognized in our fiscal year 2006. Historically, our revenues have beenseasonal, with peak sales in the spring and fall months. The seasonal nature ofour business is directly tied to the buying patterns of veterinarians forproduction animal health products used for certain medical procedures performedon production animals during the spring and fall months. These buying patternscan also be affected by vendors’ and distributors’ marketing programs launchedduring the summer months, particularly in June, which can cause veterinariansto purchase production animal health products earlier than those products areused. This kind of early purchasing may reduce our sales in the months thesepurchases would have otherwise been made. While companion animal products tendto have a different product use cycle than production animal health products,and approximately two-thirds of our revenues have been generated from sales tothe companion animal market, we cannot assure you that our revenues and operatingresults will not continue to fluctuate on a quarter-to-quarter basis. Webelieve period-to-period comparisons of our results of operations are notnecessarily meaningful as our future revenue and results of operations may varysubstantially. It is also possible that in future quarters our results ofoperations will be below the expectations of securities analysts and investors.In either case, the price of our common stock could decline, possiblymaterially.

**Ourmarket is highly competitive. Failure to compete successfully could have amaterial adverse effect onour business, financial condition and results of operations.**

Themarket for veterinary distribution services is highly competitive, continuallyevolving and subject to technological change. We compete with numerous vendorsand distributors based on customer relationships, service and delivery, productselection, price and e-business capabilities including:

·       ButlerAnimal Health Supply;

·       HenrySchein, Inc.;

·       LextronAnimal Health, Inc.;

·       ProfessionalVeterinary Products, Ltd.;

·       VetPharm, Inc.;

·       AnimalHealth International, Inc. (formerly Walco International, Inc.)

·       WebsterVeterinary Supply, a division of Patterson Companies, Inc.; and

·       othernational, regional, local and specialty distributors.

Some of our competitorsmay have more customers, stronger brand recognition or greater financial andother resources than we do. Most of our products are available from severalsources, including other 

16

----

distributorsand vendors, and our customers typically have relationships with severaldistributors and vendors. Many of our competitors have comparable productlines, technical expertise or distribution strategies that directly competewith us. Our competitors could obtain exclusive rights to distribute certainproducts, eliminating our ability to distribute those products. The entry ofnew distributors in the industry could also have a material adverse effect onour ability to compete. Additionally, some of our vendors may decide to competewith us by selling their products directly to our customers. If we do notcompete successfully against these organizations, it could have a material andadverse effect on our business, financial condition and results of operations.

**Consolidationin the veterinary distribution business and veterinary practices may decreaseour revenues andprofitability.**

Consolidation in theveterinary distribution business could result in existing competitorsincreasing their market share, which could give them greater pricing power,decrease our revenues and profitability, and increase the competition forcustomers. Consolidation of the many small, privately-held veterinary practiceswould result in an increasing number of larger veterinary practices, whichcould have increased purchasing leverage and the ability to negotiate lowerproduct costs. This could reduce our operating margins and negatively impactour revenues and profitability. Any of these developments could result inincreased marketing expenses and have a material adverse effect on ourbusiness, financial condition and results of operations.

**Ourbusiness, financial condition and results of operations depend upon maintainingour relationships withvendors.**

At September 30, 2006we distributed more than 10,000 products sourced from more than 400 vendors toover 15,000 veterinary practices. We currently do not manufacture any of ourproducts and are dependent on these vendors for our supply of products. Our topthree vendors, Fort Dodge, Pfizer and Vedco, supplied products that accountedfor approximately 44% of our revenues for our fiscal year ended September 30,2006, and 45% of our revenues for our fiscal years ended September 30,2005 and 2004, respectively. Our ten largest vendors supplied products thataccounted for approximately 70%, 73% and 72% of our revenues for the fiscalyears ended September 30, 2006, 2005 and 2004, respectively.

Our ability to sustain ourgross profits has been, and will continue to be, dependent in part upon ourability to obtain favorable terms and access to new and existing products fromour vendors. These terms may be subject to changes from time to time byvendors, such as changing from a “buy/sell” to an agency relationship, or froman agency to a “buy/sell” relationship. In a “buy/sell” transaction, wepurchase or take inventory of products from our vendors. Under an agencyrelationship, when we receive orders for products from a customer, we transmitthe order to the vendor who then picks, packs and ships the products. Anychanges from “buy/sell” to agency or from agency to “buy/sell” could adverselyaffect our revenues and operating income. The loss of one or more of our largevendors, a material reduction in their supply of products to us or materialchanges in the terms we obtain from them could have a material adverse effecton our business, financial condition and results of operations.

Some of our current andfuture vendors may decide to compete with us in the future by pursuing orincreasing their efforts in direct marketing and sales of their products. Thesevendors could sell their products at lower prices and maintain a higher grossmargin on their product sales than we can. In this event, veterinarians oranimal owners may elect to purchase animal health products directly from thesevendors. Increased competition from any vendor of animal health products couldsignificantly reduce our market share and adversely impact our financialresults.

In addition, we may not beable to establish relationships with key vendors in the animal health industryif we have established relationships with competitors of these key vendors. Wehave written agreements with approximately 30 of our vendors, including FortDodge and Pfizer. Some of our 

17

----

agreementswith vendors are for one-year periods. Upon expiration, we may not be able torenew our existing agreements on favorable terms, or at all. For example,vendors could require us to distribute their products on an exclusive basis,which could cause us to forgo distributing competing products which may also beprofitable. Competitors could obtain exclusive rights to market particularproducts, which we would be unable to market. If we lose the right todistribute products under such agreements, we may lose access to certainproducts and lose a competitive advantage. Potential competitors could sellproducts from vendors that we fail to continue with and erode our market share.

**Werely substantially on third-party vendors, and the loss of products or delaysin product availabilityfrom one or more third-party vendors could substantially harm our business.**

We must contract for thesupply of current and future products of appropriate quantity, quality andcost. These products must be available on a timely basis and be in compliancewith any regulatory requirements. Failure to do so could substantially harm ourbusiness.

Weoften purchase products from our vendors under agreements that typically have aterm of one year and can be terminated on a periodic basis. There can be noassurance, however, that our vendors will be able to meet their obligationsunder these agreements or that we will be able to compel them to do so. Risksof relying on vendors include:

·       Ifan existing agreement expires or a certain product line is discontinued orrecalled, then we would not be able to continue to offer our customers the samebreadth of products and our sales and operating results would likely sufferunless we are able to find an alternate supply of a similar product.

·       Ifmarket demand for our products increases suddenly, our current vendors mightnot be able to fulfill our commercial needs, which would require us to seek newmanufacturing arrangements or fund new sources of supply, and may result insubstantial delays in meeting market demand. If we consistently generate moredemand for a product than a given vendor is capable of handling, it could leadto large backorders and potentially lost sales to competitive products that aremore readily available.

·       Wemay not be able to control or adequately monitor the quality of products wereceive from our vendors. Poor quality products could damage our reputationwith our customers.

·       Someof our third party vendors are subject to ongoing periodic unannounced inspectionby regulatory authorities, including the FDA, the USDA, the EPA, the DEA andother federal and state agencies for compliance with strictly enforcedregulations. We do not have control over our vendors’ compliance with theseregulations and standards. Violations could potentially lead to interruptionsin supply that could lead to lost sales to competitive products that are morereadily available.

Potential problems withvendors such as those discussed above could substantially decrease sales of ourproducts, lead to higher costs and damage our reputation with our customers.

**Werely upon third parties to ship products to our customers and interruptions intheir operations couldharm our business, financial condition and results of operations.**

We use UPS as our primarydelivery service for our air and ground shipments of products to our customers.If there were any significant service interruptions, there can be no assurancethat we could engage alternative service providers to deliver these products ineither a timely or cost-efficient manner, particularly in rural areas wheremany of our customers are located. Any labor disputes, slowdowns,transportation disruptions or other adverse conditions in the transportationindustry experienced by UPS could impair or disrupt our ability to deliver ourproducts to our customers on a timely basis, and could 

18

----

have amaterial adverse effect upon our customer relationships, business, financialcondition and results of operations. For example, during the strike by membersof the International Brotherhood of Teamsters against UPS in August 1997,many of our sales representatives, some traveling hundreds of miles, wererequired to make deliveries to customers for which no alternate deliveryservice provider was available on a timely basis. In addition, rising fuelcosts may result in continued increases in shipping costs charged by UPS, orother delivery service providers, and could have an adverse effect on ourfinancial condition and results of operations.

**The loss of one or more significant customers couldadversely affect our profitability.**

Our two largest customers,Banfield and Feeders’ Advantage (a related party), accounted forapproximately 10% and 6% of our product sales for our fiscal years ended September 30,2006 and 2005. Our ten largest customers, excluding Banfield and Feeders’Advantage, accounted for approximately 5% of our product sales for our fiscalyears ended September 30, 2006 and 2005. Our business and results ofoperations could be adversely affected if the business of these customers waslost. We cannot guarantee that we will maintain or improve our relationshipswith these customers or that we will continue to supply these customers atcurrent levels. Banfield, Feeders’ Advantage and other customers may seek topurchase some of the products that we currently sell directly from the vendorsor from one or more of our competitors. Furthermore, our customers are notrequired to purchase any minimum amount of products from us. The loss ofBanfield or Feeders’ Advantage or deterioration in our relations with either ofthem could significantly affect our financial condition and results ofoperations. Additionally, deterioration in the financial condition of one ormore of our customers could have a material adverse effect on our results ofoperations.

**Failure to effectively manage growth could impair ourbusiness.**

Since fiscal 2000, we haveexperienced rapid growth and expansion, largely due to internal growthinitiatives. Our revenues increased from $195.6 million for our fiscal yearended September 30, 2000 to $606.2 million for our fiscal year ended September 30,2006. Our number of employees increased by approximately 420 individuals duringthe same period.

It maybe difficult to manage such rapid growth in the future, and our future successdepends on our ability to implement and/or maintain:

·       salesand marketing programs;

·       customerservice levels;

·       currentand new product and service lines and vendor relationships;

·       technologicalsupport which equals or exceeds our competitors;

·       recruitmentand training of new personnel; and

·       operationaland financial control systems.

Our ability tosuccessfully offer products and services and implement our business plan in arapidly evolving market requires an effective planning and management process.We expect that we will need to continue to improve our financial and managerialcontrols and reporting systems and procedures and to expand the training of ourwork force. While we believe our current systems have sufficient capacity tomeet our projected needs, we may need to increase the capacity of our currentsystems to meet additional or unforeseen demands.

If we are not able tomanage our rapid growth, there is a risk our customer service quality coulddeteriorate which may in turn lead to decreased sales or profitability. Also,the cost of our operations could increase faster than growth in our revenues,negatively impacting our profitability.

19

----

**Difficulties with the integration of acquisitions mayimpose substantial costs and delays and cause other unanticipated problemsfor us.**

Acquisitionsinvolve a number of risks relating to our ability to integrate an acquiredbusiness into our existing operations. The process of integrating theoperations of an acquired business, particularly its personnel, could causeinterruptions to our business. Some of the risks we face include:

·       the need to spendsubstantial operational, financial and management resources in integrating newbusinesses, technologies and products, and difficulties management mayencounter in integrating the operations, personnel or systems of the acquiredbusiness;

·       retention of key personnel,customers and vendors of the acquired business;

·       the occurrence of amaterial adverse effect on our existing business relationships with customersor vendors, or both, resulting from future acquisitions or business combinationscould lead to a termination of or otherwise affect our relationships with suchcustomers or vendors;

·       impairments of goodwill andother intangible assets; and

·       contingent and latent risksassociated with the past operations of, and other unanticipated costs andproblems arising in, an acquired business.

If we are unable tosuccessfully integrate the operations of an acquired business into ouroperations, we could be required to undertake unanticipated changes. Thesechanges could have a material adverse effect on our business.

**Increases inover-the-counter sales of animal health products could adversely affect ourbusiness.**

We rely, and will continueto rely, on animal owners who purchase their animal health products directlyfrom veterinarians, which we refer to as the ethical channel. There can be noassurance that animal owners will continue to use the ethical channel with thesame frequency as they have in the past, and will not increasingly purchaseanimal health products from sources other than veterinarians, such as theInternet and other over-the-counter channels. Increased competition from anydistributor of animal health products making use of an over-the-counter channelcould significantly reduce our market share and adversely impact our financialresults.

**If we fail to comply with or become subject to moreonerous government regulations, our business could be adversely affected.**

The veterinary distribution industry is subject tochanging political and regulatory influences. Both state and federal governmentagencies regulate the distribution of certain animal health products and we aresubject to regulation, either directly or indirectly, by the FDA, the USDA, theEPA, the DEA and comparable state agencies. As a distributor of prescription pharmaceuticalproducts, we are subject to the PDMA, which provides for minimum standards,terms and conditions to be maintained for licensing as a distributor. Theregulatory stance these agencies take could change. Our vendors are subject toregulation by the FDA, the USDA, the EPA the DEA, and the PDMA, as well asother federal and state agencies, and material changes to the applicableregulations could affect our vendors’ ability to manufacture certain products,which could adversely impact our product supply. In addition, some of ourcustomers may rely, in part, on farm and agricultural subsidy programs. Changesin the regulatory positions that impact the availability of funding for suchprograms could have an adverse impact on our customers’ financial positions,which could lead to decreased sales.

We strive to maintain compliance with these and allother applicable laws and regulations. We retain a Manager of RegulatoryCompliance and have engaged outside consultants as needed to assist us inmeeting and complying with the various state licensure requirements to which weare subject. If we are 

20

----

unable to maintain orachieve compliance with these laws and regulations, however, we could besubject to substantial fines or other restrictions on our ability to providecompetitive distribution services, which could have an adverse impact on ourfinancial condition.

We cannot assure you thatexisting laws and regulations will not be revised or that new, more restrictivelaws will not be adopted or become applicable to us or the products that wedistribute or dispense. For example, effective December 1, 2006, thefederal drug pedigree requirements of the FDA under the PDMA will go intoeffect. The federal pedigree regulations require tracking human labeledprescription products through the entire distribution chain and are enforceablefor distributors that do not have a written agreement with the manufacturergranting the wholesale distributor status as an “Authorized Distributor ofRecord.” We cannot assure you that the vendors of products that may becomesubject to more stringent laws will not try to recover any or all increasedcosts of compliance from us by increasing the prices at which we purchaseproducts from them, or, that we will be able to recover any such increasedprices from our customers. We also cannot assure you that our business andfinancial condition will not be materially and adversely affected by futurechanges in applicable laws and regulations.

**Loss of keymanagement or sales representatives could harm our business.**

Our future success depends to a significant extent onthe skills, experience and efforts of management, including our President andChief Executive Officer, Mr. James F. Cleary, Jr. While we have notexperienced problems in the past attracting and maintaining members of ourmanagement team, the loss of any or all of these individuals could adverselyimpact our business. We do not carry key-man life insurance on any member ofmanagement. In addition we do not have employment agreements with key membersof our senior management team. We must continue to develop and retain a coregroup of individuals if we are to realize our goal of continued expansion andgrowth. We cannot assure you that we will be able to do so in the future.

Also, due to thespecialized nature of our products and services, generally only highlyqualified and trained sales representatives have the necessary skills to marketour products and provide our services. These individuals develop relationshipswith our customers that could be damaged if these employees are not retained.We face intense competition for the hiring of these professionals. Any failureon our part to hire, train and retain a sufficient number of qualifiedprofessionals would damage our business. We do not generally enter intoagreements that contain non-competition provisions with any of our employees,other than with members of our senior management team.

**Failure of, orsecurity problems with, our information systems could damage our business.**

Our information systemsare dependent on third party software, global communications providers,telephone systems and other aspects of technology and Internet infrastructurethat are susceptible to failure. Though we have implemented security measuresand some redundant systems, our customer satisfaction and our business could beharmed if we or our vendors experience any system delays, failures, loss ofdata, power outages, computer viruses, break-ins or similar disruptions. Wecurrently process all customer transactions and data at our facilities inMeridian, Idaho. Although we have safeguards for emergencies, including,without limitation, sophisticated back-up systems, the occurrence of a majorcatastrophic event or other system failure at any of our distributionfacilities could interrupt data processing or result in the loss of storeddata. This may result in the loss of customers or a reduction in demand for ourservices. Only some of our systems are fully redundant and although we do carrybusiness interruption insurance, it may not be sufficient to compensate us forlosses that may occur as a result of system failures. If a disruption occurs,our profitability and results of operations may suffer.

21

----

**Theoutbreak of an infectious disease within either the production animal orcompanion animalpopulation could have a significant adverse effect on our business and ourresults of operations.**

An outbreak of diseaseaffecting animals, such as foot-and-mouth disease, avian influenza or bovinespongiform encephalopathy, commonly referred to as “mad cow disease,” couldresult in the widespread destruction of affected animals and consequentlyresult in a reduction in demand for animal health products. In addition,outbreaks of these or other diseases or concerns of such diseases could createadverse publicity that may have a material adverse effect on consumer demandfor meat, dairy and poultry products, and, as a result, on our customers’demand for the products we distribute. The outbreak of a disease among thecompanion animal population which could cause a reduction in the demand forcompanion animals could also adversely affect our business. Although we havenot been adversely impacted by the outbreak of a disease in the past, there canbe no assurance that a future outbreak of an infectious disease will not havean adverse effect on our business.

**We may be subjectto product liability and other claims in the ordinary course of business.**

Our business involves arisk of product liability and other claims in the ordinary course of business,for example arising from shipping mislabeled or outdated product. We maintaingeneral liability insurance with policy limits of $1.0 million per incident and$2.0 million in the aggregate, and in many cases we have indemnification rightsagainst such claims from the manufacturers of the products we distribute. We donot maintain a separate product liability insurance policy because we do notcurrently manufacture any of the products that we sell. Our ability to recoverunder insurance or indemnification arrangements is subject to the financialviability of the insurers and manufacturers. We cannot assure you that ourinsurance coverage or the manufacturers’ indemnity will be available orsufficient in any future cases brought against us.

**A prolongedeconomic downturn could materially adversely affect our business.**

Our business may bematerially adversely affected by prolonged, negative trends in the generaleconomy that could reduce consumer discretionary spending on animal healthproducts. Our business ultimately depends on the ability and willingness ofanimal owners to pay for our products. This dependence could make us morevulnerable to any reduction in consumer confidence or disposable income thancompanies in other industries that are less reliant on consumer spending, suchas the human health care industry, in which a large portion of payments aremade by insurance programs.

**We may not be ableto raise needed capital in the future on favorable terms or at all.**

We expect that our existingsources of cash, together with any funds generated from operations, will besufficient to meet our anticipated capital needs for at least the next twelvemonths. However, we may require additional capital to finance our growthstrategies or other activities in the future. Our capital requirements willdepend on many factors, including the costs associated with our growth andexpansion. Additional financing may not be available when needed and, if suchfinancing is available, it may not be available on terms favorable to us. Ourfailure to raise capital when needed could have an adverse effect on ourbusiness, financial condition and results of operations.

**Our variable rate indebtedness subjects us to interestrate risk, which could cause our debt service obligations to increasesignificantly.**

Certain of our borrowings,primarily borrowings on the revolving credit facility under our amended creditagreement, are or will be at variable rates of interest and expose us tointerest rate risk based on market rates. In the last year there has been ageneral increase in borrowing rates in the United States. If interest ratescontinue to increase, our debt service obligations on any future variable rateindebtedness that we may incur on our revolving credit facility would increaseeven if the amount borrowed remained the same, and our net income and cashavailable for servicing our indebtedness would decrease. Our 

22

----

variablerate debt as of September 30, 2006 was approximately $11.0 million(comprised of $10.6 million credit facility and $0.4 million promissory note).Our interest expense for fiscal year 2006 was approximately $2.0 million andwas approximately $2.5 million (excluding $4.1 million of accretion of our Series Apreferred stock dividends) for the fiscal year 2005. A 1% increase in theaverage interest rate would increase future interest expense by approximately$0.1 million per year assuming an average outstanding balance on our revolvingcredit facility of $11.0 million. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Liquidity and Capital Resources.”

**The requirements of being a public company may strainour resources and distract our management.**

As a public company, weare subject to the reporting requirements of the Securities Exchange Act of1934, as amended, or the Exchange Act, and the Sarbanes-Oxley Act of 2002, orthe Sarbanes-Oxley Act. These requirements place a strain on our systems andresources. The Exchange Act requires that we file annual, quarterly and currentreports with respect to our business and financial condition. TheSarbanes-Oxley Act requires that we maintain effective disclosure controls andprocedures and internal controls for financial reporting. Compliance with theseregulations requires significant resources and management oversight. Theincurrence of the costs could put us at a competitive disadvantage, becausemost of our significant competitors are not public companies and are notrequired to incur these costs.

***Item 1B.****                  UnresolvedStaff Comments.*

None.

***Item 2.****                          Properties.*

Thetable below provides a summary of the Company’s principal facilities as of September 30,2006:

| **Location**              | ** ** | ** ** | ** ** | **Total Square  Feet(1)** | ** ** | **Leased or  Owned** | ** ** | **Principal Function** | ** ** |
|---------------------------|------------|------------|------------|--------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| Meridian, Idaho           |       |       | 34,000     |                           |       |                      | Leased     |                        |       | Headquarters  and call center |   |
| Atlanta, Georgia          |       |       | 25,000     |                           |       |                      | Leased     |                        |       | Distribution  center |   |
| Clear Lake,  Wisconsin    |       |       | 25,000     |                           |       |                      | Leased     |                        |       | Distribution  center and call center |   |
| Denver, Colorado          |       |       | 59,000     |                           |       |                      | Leased     |                        |       | Distribution  center and call center |   |
| Fife, Washington          |       |       | 30,000     |                           |       |                      | Leased     |                        |       | Distribution  center |   |
| Glendale, Arizona         |       |       | 16,000     |                           |       |                      | Leased     |                        |       | Distribution  center |   |
| Grand Prairie,  Texas     |       |       | 35,000     |                           |       |                      | Leased     |                        |       | Distribution  center, call center and pharmacy |   |
| Harrisburg,  Pennsylvania |       |       | 40,000     |                           |       |                      | Leased     |                        |       | Distribution  center, call center and pharmacy |   |
| Holland, Michigan         |       |       | 25,000     |                           |       |                      | Leased     |                        |       | Distribution  center and call center |   |
| Nampa, Idaho              |       |       | 30,000     |                           |       |                      | Leased     |                        |       | Distribution  center and pharmacy |   |
| Orlando, Florida          |       |       | 30,000     |                           |       |                      | Leased     |                        |       | Distribution  center |   |
| San Antonio,  Texas       |       |       | 19,000     |                           |       |                      | Leased     |                        |       | Distribution  center and call center |   |
| Visalia, California       |       |       | 52,000     |                           |       |                      | Leased     |                        |       | Distribution center |   |

----

(1)          Roundedto the nearest thousand square feet.

***Item. 3.****                       LegalProceedings.*

We are not a party to anymaterial pending legal proceedings and are not aware of any claims that couldhave a materially adverse effect on our financial position, results ofoperations, or cash flows.

***Item 4.****                          Submissionof Matters to a Vote of Security Holders.*

None.

23

----

**PART II**

***Item 5.****                          Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of EquitySecurities.*

Ourcommon stock has been quoted on the Nasdaq under the symbol “MWIV” since August 3,2005. Prior to that date there was no public market for our common stock. Thefollowing table sets forth, for the period indicated, the high and low salesprices of our common stock, reported by the Nasdaq National Market from August 2005through June 2006, and by the Nasdaq Global Select Market from July 2006forward.

| ** **                                     | ** ** | **Common Stock Price**                         | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                     | ** ** | **    High    ** | ** ** | **    Low    ** | ** ** |
| **Fiscal Year Ended  September 30, 2005** | ** ** |                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Fourth Quarter (from August 3, 2005)      |       |                                                     | $          | 24.18 | ** ** |   |   | $ | 19.78 | ** ** |   |
| **Fiscal Year Ended  September 30, 2006** | ** ** |                                                     | ** ** | ** ** |   |   | ** ** | ** ** |   |
| First Quarter                                  |       |                                                     | $          | 26.49 | ** ** |   |   | $ | 19.87 | ** ** |   |
| Second Quarter                                 |       |                                                     | $          | 36.31 | ** ** |   |   | $ | 23.79 | ** ** |   |
| Third Quarter                                  |       |                                                     | $          | 37.29 | ** ** |   |   | $ | 29.25 | ** ** |   |
| Fourth Quarter                                 |       |                                                     | $          | 38.61 | ** ** |   |   | $ | 30.56 | ** ** |   |

 

At the close of businesson November 17, 2006, we had approximately 11,559,000 shares of commonstock issued and outstanding. As of that date, there were approximately 4,600registered holders of record of our common stock.

We have not paid ordeclared any dividends on our common stock and do not anticipate paying anydividends on our common stock in the foreseeable future. Our amended creditagreement prohibits us from declaring or paying dividends on our common stock. Weintend to retain future earnings to finance the ongoing operations and growthof our business. Any future determination relating to our dividend policy willbe made at the discretion of our board of directors and will depend onconditions at that time, including our financial condition, results ofoperations, contractual restrictions, capital requirements, business prospectsand other factors our board of directors may deem relevant.

We did not make any commonstock repurchases during the fiscal year ended September 30, 2006.

***Equity CompensationPlan Information***

Thefollowing table provides information as of September 30, 2006 about thecommon stock that may be issued under all of our existing equity compensationplans, including the 2002 Stock Plan and 2005 Stock-Based IncentiveCompensation Plans. Both of these plans have been approved by our stockholders.

| ** **                                                  | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights  (a)** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights  (b)** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities reflected in  column (a))  (c)** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       |                                                                                                                                                      | 540,895    |                                                                                                                 |       |                                                                                                                                                                                                                  | $          | 3.32 |   |   |   | 1,129,860 |   |   |
| Equity compensation plans not approved by security  holders |       |                                                                                                                                                      | —     |                                                                                                                 |       |                                                                                                                                                                                                                  | —     |   |   |   | — |   |   |
| Total                                                       |       |                                                                                                                                                      | 540,895    |                                                                                                                 |       |                                                                                                                                                                                                                  | $          | 3.32 |   |   |   | 1,129,860 |   |   |

 

24

----

***Item 6.****                          SelectedFinancial Data.*

The selected consolidated financial data below isderived from the following sources:

·       Theconsolidated financial statements of our company while it was operated by AgriBeef Co. (which we refer to as our Predecessor) for the fiscal year endedSeptember 30, 2001 and for the period from October 1, 2001 toJune 17, 2002. Our Predecessor’s financial statements, which have beenaudited by an independent registered public accounting firm, represent ourresults of operations for those periods.

·       Ourconsolidated financial statements for the period from June 18, 2002 toSeptember 30, 2002 and as of and for our fiscal years endedSeptember 30, 2003, 2004, 2005, and 2006 which have been audited by anindependent registered public accounting firm.

The selected consolidatedfinancial and other data below represent portions of our financial statementsand are not complete. You should read this information together with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour consolidated financial statements and the related notes to these statementsincluded in this annual report. Historical results are not necessarilyindicative of future performance.

| ** **                                        | ** ** | **2001**                                                              | ** ** | **2002**                                                   | ** ** | **2003**      | ** ** | **2004**                                                     | ** ** | **2005**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------|------------|---------------|------------|--------------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **Predecessor**                                                       | ** ** | ** **                                                 | ** ** | **Successor** | ** ** |
| ** **                                        | ** ** | ** **                                                            | ** ** | **Oct. 1, 2001 -  Jun. 17, 2002** | ** ** | ** **    | ** ** | **Jun. 18, 2002 -  Sept. 30, 2002** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **(In thousands, except per share amounts)** | ** ** |
| Revenues:                                         |       |                                                                  |       |                                                       |       |          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Product sales                                     |       | $                                                                     | 219,407    |                                                       |       | $             | 177,135    |                                                         |       |       |       |       | $          | 84,467 |   |   | $ | 315,738 |   | $ | 367,863 |   | $ | 463,272 |   | $ | 564,289 |   |
| Product sales to  related party                   |       | —                                                                |       |                                                       | 9,947      |          |       |                                                         |       |       | 7,329      |       |       | 22,960 |   | 22,163 |   | 28,473 |   | 34,123 |   |
| Commissions                                       |       | 2,006                                                                 |       |                                                       | 1,268      |          |       |                                                         |       |       | 1,009      |       |       | 3,011 |   | 4,256 |   | 4,910 |   | 7,782 |   |
| Total revenues                                    |       | 221,413                                                               |       |                                                       | 188,350    |          |       |                                                         |       |       | 92,805     |       |       | 341,709 |   | 394,282 |   | 496,655 |   | 606,194 |   |
| Cost of product  sales                            |       | 188,260                                                               |       |                                                       | 161,840    |          |       |                                                         |       |       | 80,032     |       |       | 294,692 |   | 338,684 |   | 426,709 |   | 518,068 |   |
| Gross profit                                      |       | 33,153                                                                |       |                                                       | 26,510     |          |       |                                                         |       |       | 12,773     |       |       | 47,017 |   | 55,598 |   | 69,946 |   | 88,126 |   |
| Selling, general  and administrative  expenses(1) |       | 25,009                                                                |       |                                                       | 20,082     |          |       |                                                         |       |       | 11,115     |       |       | 35,886 |   | 41,872 |   | 52,647 |   | 62,470 |   |
| Depreciation and  amortization                    |       | 835                                                                   |       |                                                       | 577        |          |       |                                                         |       |       | 285        |       |       | 976 |   | 1,146 |   | 1,528 |   | 1,964 |   |
| Operating income                                  |       | 7,309                                                                 |       |                                                       | 5,851      |          |       |                                                         |       |       | 1,373      |       |       | 10,155 |   | 12,580 |   | 15,771 |   | 23,692 |   |
| Other income (expense):                           |       |                                                                  |       |                                                       |       |          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Interest expense(2)                               |       | (1,255                                                                | )          |                                                       | (731       | )             |       |                                                         |       |       | (644       | )          |       | (3,034 | ) | (6,098 | ) | (6,515 | ) | (1,959 | ) |
| Other income  (expense)                           |       | (146                                                                  | )          |                                                       | 203        |          |       |                                                         |       |       | 59         |       |       | 324 |   | 322 |   | 399 |   | 499 |   |
| Total other income  (expense)                     |       | (1,401                                                                | )          |                                                       | (528       | )             |       |                                                         |       |       | (585       | )          |       | (2,710 | ) | (5,776 | ) | (6,116 | ) | (1,460 | ) |
| Income before  taxes                              |       | 5,908                                                                 |       |                                                       | 5,323      |          |       |                                                         |       |       | 788        |       |       | 7,445 |   | 6,804 |   | 9,655 |   | 22,232 |   |
| Income taxes                                      |       | (2,246                                                                | )          |                                                       | (2,043     | )             |       |                                                         |       |       | (297       | )          |       | (3,116 | ) | (4,280 | ) | (5,098 | ) | (8,396 | ) |
| Net income                                        |       | 3,662                                                                 |       |                                                       | 3,280      |          |       |                                                         |       |       | 491        |       |       | 4,329 |   | 2,524 |   | 4,557 |   | 13,836 |   |
| Accretion of  redeemable preferred stock          |       | —                                                                |       |                                                       | —     |          |       |                                                         |       |       | (995       | )          |       | (2,714 | ) | — |   | — |   | — |   |
| Income (loss)  available to common stockholders   |       | $                                                                     | 3,662      |                                                       |       | $             | 3,280      |                                                         |       |       |       |       | $          | (504 | ) |   | $ | 1,615 |   | $ | 2,524 |   | $ | 4,557 |   | $ | 13,836 |   |
| Earnings (loss) per common share:            |       |                                                                  |       |                                                       |       |          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Basic                                             |       | NM                                                                    |       |                                                       | NM         |          |       |                                                         |       |       | $          | (0.10      | )          |   | $ | 0.32 |   | $ | 0.50 |   | $ | 0.76 |   | $ | 1.28 |   |
| Diluted                                           |       | NM                                                                    |       |                                                       | NM         |          |       |                                                         |       |       | $          | (0.10      | )          |   | $ | 0.28 |   | $ | 0.43 |   | $ | 0.68 |   | $ | 1.25 |   |
| Shares used in computing earnings per share:      |       |                                                                  |       |                                                       |       |          |       |                                                         |       |       |       |       |       |   |   |   |   |   |   |   |   |
| Basic                                             |       | NM                                                                    |       |                                                       | NM         |          |       |                                                         |       |       | 4,978      |       |       | 5,013 |   | 5,038 |   | 5,970 |   | 10,773 |   |
| Diluted                                           |       | NM                                                                    |       |                                                       | NM         |          |       |                                                         |       |       | 4,978      |       |       | 5,745 |   | 5,878 |   | 6,697 |   | 11,072 |   |

 

25

----

“NM,”as used in the table above, means not meaningful because of the substantialchanges to our capital structure resulting from our acquisition of MWIVeterinary Supply Co. from Agri Beef Co. effective as of June 18, 2002.

| ** **                       | ** ** | **As of September 30,** | ** **              |       |
|----------------------------------|------------|----------------------------------------|-------------------------|------------|
| ** **                       | ** ** | **2001**                               | ** **              | ** ** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                       | ** ** | **Predecessor**                        | ** **              | ** ** | ** ** | **Successor** | ** ** |
| ** **                       | ** ** | ** **                             | **(In thousands)** | ** ** |   |
| Cash                             |       |                                   | $                       | 33         |   |   |   |   | $ | 36 |   | $ | 36 |   | $ | 28 |   | $ | 31 |   | $ | 37 |   |
| Total assets                     |       |                                   | 79,715                  |       |   |   |   | 115,070 |   | 122,270 |   | 146,565 |   | 188,244 |   | 230,559 |   |
| Total debt                       |       |                                   | 14,155                  |       |   |   |   | 41,719 |   | 33,972 |   | 50,149 |   | 25,177 |   | 10,948 |   |
| Redeemable  preferred stock      |       |                                   | —                  |       |   |   |   | 27,495 |   | 31,494 |   | 35,733 |   | — |   | — |   |
| Total stockholders’  equity |       |                                   | 17,962                  |       |   |   |   | 353 |   | 2,113 |   | 4,632 |   | 86,694 |   | 129,626 |   |
|                                  |            |                                        |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                              | ** ** | **Year Ended September 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                              | ** ** | **2001**                                    | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **Predecessor**                             | ** ** | ** ** | ** ** | **Successor** | ** ** |
| ** **                                              | ** ** | ** **                                  | ** ** | **Oct. 1, 2001 -  Jun. 17, 2002** | ** ** | ** ** | ** ** | **Jun. 18, 2002 -  Sept. 30 , 2002** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Other  Data (unaudited):**                            | ** ** |                                        | ** ** | ** ** |   |   | ** ** | ** ** |   |   |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Product sales from Internet as a percentage of sales(3) |       |                                        | —     |   |   |   | 16 | % |   |   |   |   | 19 | % |   |   | 18 | % |   |   | 18 | % |   |   | 21 | % |   |   | 23 | % |   |
| Field sales personnel (at end of period)                |       |                                        | 71         |   |   |   | 82 |   |   |   |   |   | 82 |   |   |   | 94 |   |   |   | 111 |   |   |   | 134 |   |   |   | 155 |   |   |
| Telesales representatives (at end of period)            |       |                                        | 47         |   |   |   | 63 |   |   |   |   |   | 69 |   |   |   | 75 |   |   |   | 79 |   |   |   | 93 |   |   |   | 106 |   |   |
| Warehouses                                              |       |                                        | 7          |   |   |   | 8 |   |   |   |   |   | 8 |   |   |   | 8 |   |   |   | 9 |   |   |   | 10 |   |   |   | 12 |   |   |
| Fill rate(4)                                            |       |                                        | 98         | % |   |   | 98 | % |   |   |   |   | 98 | % |   |   | 98 | % |   |   | 98 | % |   |   | 98 | % |   |   | 98 | % |   |

----

(1)          Includesmanagement fees expense of $72 for the period June 18, 2002 - September 30,2002, and $250, $386 and $2,456 for our fiscal years ended September 30,2003, 2004 and 2005, respectively, as a result of payments to BRS and Agri BeefCo. The management and consulting services agreement was terminated in August 2005for a termination fee of $2,000 that is included in the management fee expenseof $2,456 for fiscal year ended September 30, 2005.

(2)          Includesaccretion of our Series A preferred stock dividends beginning on July 1,2003, which is nondeductible for income tax purposes. Accretion expenseincluded as a component of interest expense was $999, $4,239 and $4,055 forfiscal years ended September 30, 2003, 2004 and 2005, respectively. Weused a portion of the proceeds from our initial public offering in August 2005to redeem all the Series A preferred stock.

(3)          Informationfor our fiscal year ended September 30, 2001 is not readily available.

(4)          Definedas, for any period, the dollar value of orders shipped the same day they wereplaced from any warehouse expressed as a percentage of the total dollar valueof the orders placed by customers in the period.

26

----

***Item 7.*****           Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

*All dollar amounts are presented in thousands, exceptfor per share amounts.*

**Overview**

We are a leading distributor of animal health productsto veterinarians across the United States. We market our products toveterinarians in both the companion and production animal markets. Our growthhas primarily been from internal growth initiatives and, to a lesser extent,selective acquisitions.

Historically, approximately two-thirds of our totalrevenues have been generated from sales to the companion animal market andone-third from sales to the production animal market. We intend to continue tosupport production animal veterinarians with a broad range of products and value-addedservices. However, the increasing maturity of the production animal marketresults in lower margins on product sales relative to the companion animalmarket. We intend to increase our focus on the companion animal market, whichwe believe is growing due to the increasing number of households with companionanimals, increased expenditures on animal health and preventative care, anaging pet population, advancements in pharmaceuticals and diagnostic testingand extensive marketing programs sponsored by companion animal nutrition andpharmaceutical companies. While the average order size for companion animalhealth products is often smaller than production animal health products,companion animal health products typically have higher margins.

We sell products that we source from our vendors toour customers through either a “buy/sell” transaction or an agency relationshipwith our vendors. In a “buy/sell” transaction, we purchase or take inventory ofproducts from our vendors. When a customer places an order with us, we pick,pack, ship and invoice the customer for the order. We record sales from“buy/sell” transactions, which account for the vast majority of our business,as revenues in conformity with accounting principles generally accepted in theUnited States. In an agency relationship, we generally do not purchase and takeinventory of products from our vendors. When we receive an order from ourcustomer, we transmit the order to our vendor, who picks, packs and ships the orderto our customer. In some cases, our vendor invoices and collects payment fromour customer, while in other cases we invoice and collect payment from ourcustomer on behalf of our vendor. We receive a commission payment forsoliciting the order from our customer and for providing other customer serviceactivities. The aggregate revenues we receive in agency transactions constitutethe “commissions” line item on our consolidated statements of income and arerecorded in conformity with accounting principles generally accepted in theUnited States. Our vendors determine the method we use to sell our products.Historically, vendors have occasionally switched between the “buy/sell” andagency models for particular products in response to market conditions relatedto that particular product. A switch between models can impact our revenues andour operating income. We cannot know in advance when a vendor will switchbetween the “buy/sell” and agency models or what impact, if any, such a changemay have. A switch can occur even with vendors with whom we have writtenagreements, because most of our agreements with vendors have relatively shortterms and are terminable with or without cause on short notice, normally 30 to90 days. The impact of any individual change from a “buy/sell” to anagency model depends on the costs and expenses associated with a particularproduct, and can have either a positive or a negative effect on ourprofitability.

We typically renegotiate vendor contracts annually.These vendor contracts may include terms defining rebates, commissions, andexclusivity requirements. For example, vendors could require us to distributetheir products on an exclusive basis, which could cause us to foregodistributing competing products which may also be profitable. Conversely,competitors could obtain exclusive rights to market particular products, whichwe would be unable to market. If we lose the right to distribute products undersuch exclusive agreements, we may lose access to certain products and lose acompetitive advantage. Exclusivity agreements could allow potential competitorsto sell products that we cannot offer and erode 

27

----

our market share.Additionally, many of our vendors’ rebate programs are based on a calendaryear. Historically, the three months ended December 31 has been our mostsignificant quarter for recognition of rebates. Vendor rebates based on salesare classified in our accompanying consolidated statements of income as areduction to cost of product sales at the time the sales performance measuresare achieved. Purchase rebates are measured against inventory purchases fromthe vendors and are a reduction of inventory until the product is sold. Whenthe inventory is sold, purchase rebates are recognized as a reduction to costof product sales. During calendar year2006, certain of our vendors modified their rebate programs with us. Theserebate program modifications changed the revenue growth targets from annual-weighted calendaryear targets to either quarterly or trimester growth targets. Thesemodifications resulted in rebates previously expected to be earned andrecognized in our first fiscal quarter 2007 ending December 31, 2006 to berecognized in our fiscal year 2006.

*TotalRevenues.**  *Our totalrevenues increased from $221,413 for our fiscal year ended September 30,2001 to $606,194 for our fiscal year ended September 30, 2006. Our revenuegrowth has been driven by our ability to offer a broad product selection atcompetitive prices with high levels of customer service and support and anexpansion in the number of veterinary practices to which we distributeproducts. We have continually added new vendor relationships to expand ourproduct offering and field sales representatives to increase our customerreach, principally in the Southeast, Northeast and Midwest regions of theUnited States.

*OperatingExpenses.**  *Ourselling, general and administrative expenses increased from $25,009 for ourfiscal year ended September 30, 2001 to $62,470 for our fiscal year endedSeptember 30, 2006. Selling, general and administrative expenses consistmainly of payroll and benefits, warehouse operating supplies, occupancyexpenses and other general corporate expenses. Our selling, general andadministrative expenses as a percentage of total revenues were 10.3% for ourfiscal year ended September 30, 2006, compared to 11.3% for the sameperiod in 2001. Historically, our selling, general and administrative expenseshave grown at a slower rate than our revenues, which has been a contributingfactor to our increasing profitability. By leveraging our existinginfrastructure, we have been able to increase our revenues without having toinvest in additional management personnel or facilities at the same rate.

*InitialPublic Offering.*   On August 3,2005, we completed our initial public offering in which we sold an aggregate of4,983,334 shares (including the exercise of the underwriters’ over-allotmentoption) of our common stock at a price of $17 per share. We received netproceeds of $77,159 after deducting the underwriting discounts and offeringexpenses. We used the net proceeds to redeem all of our Series A preferredstock for approximately $39,789 and to repay approximately $37,370 ofborrowings outstanding on our revolving credit facility under our amendedcredit agreement.

*Follow-onOffering.*   In the fourth quarter endedSeptember 30, 2006, we issued 908,846 shares (including the shares issuedupon the partial exercise of the underwriters’ over-allotment option) of ourcommon stock at a price of $32.25 per share. We used net proceeds of $27,341received from this offering to pay down our borrowings on our revolving creditfacility.

*Acquisitions.*   OnNovember 1, 2004, we acquired certain assets of Memorial PetCare, Inc., a pet crematorium located in Meridian, Idaho. Memorial PetCare presently operates in southwestern Idaho and eastern Oregon and servesveterinary practices and their clients by providing pet cremation services.

On January 3, 2005, we acquired substantially allof the assets of Vetpo, a regional animal health products distributor locatedin Holland, Michigan. This acquisition has enabled us to substantially expandour market presence and improve our distribution capabilities in Michigan,Illinois, Indiana, Ohio and Wisconsin.

On May 8, 2006, weacquired substantially all of the assets of Northland for approximately $4,546,consisting of $3,551 in cash (including direct acquisition costs ofapproximately $116) and 28,744 shares of 

28

----

unregisteredrestricted common stock valued at the time of issuance at approximately $995.Based in Clear Lake, Wisconsin, Northland is a distributor of animal healthproducts to veterinary practices and producers across the Midwestern portion ofthe United States. Fair values of the assets acquired and liabilities assumedas a result of this acquisition are discussed in Note 3 “Business Acquisitions”to the consolidated financial statements.

**Results ofOperations**

The following tablessummarize our historical results of operations for our fiscal years endedSeptember 30, 2004, 2005 and 2006.

***Summary ConsolidatedResults of Operations Table***
|                                                                                | ** ** | **Year Ended September 30,**                         | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                                                            | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| ** **                                                                     | ** ** | **(In thousands, except per share data.)** | ** ** |
| Revenues:                                                                      |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Product sales                                                                  |       | $                                                                   | 367,863    |   | 93.3 | % | $ | 463,272 |   | 93.3 | % | $ | 564,289 |   | 93.1 | % |
| Product sales to related party                                                 |       | 22,163                                                              |       | 5.6 | % | 28,473 |   | 5.7 | % | 34,123 |   | 5.6 | % |
| Commissions                                                                    |       | 4,256                                                               |       | 1.1 | % | 4,910 |   | 1.0 | % | 7,782 |   | 1.3 | % |
| Total revenues                                                                 |       | 394,282                                                             |       | 100.0 | % | 496,655 |   | 100.0 | % | 606,194 |   | 100.0 | % |
| Cost of product  sales                                                         |       | 338,684                                                             |       | 85.9 | % | 426,709 |   | 85.9 | % | 518,068 |   | 85.5 | % |
| Gross profit                                                                   |       | 55,598                                                              |       | 14.1 | % | 69,946 |   | 14.1 | % | 88,126 |   | 14.5 | % |
| Selling, general  and administrative expenses(1)      |       | 41,872                                                              |       | 10.6 | % | 52,647 |   | 10.6 | % | 62,470 |   | 10.3 | % |
| Depreciation and  amortization                                                 |       | 1,146                                                               |       | 0.3 | % | 1,528 |   | 0.3 | % | 1,964 |   | 0.3 | % |
| Operating income                                                               |       | 12,580                                                              |       | 3.2 | % | 15,771 |   | 3.2 | % | 23,692 |   | 3.9 | % |
| Other income  (expense):                                                       |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Interest expense(2)                                                            |       | (6,098                                                              | )          | -1.6 | % | (6,515 | ) | -1.3 | % | (1,959 | ) | -0.3 | % |
| Earnings of  equity method investees                                           |       | 104                                                                 |       | 0.0 | % | 131 |   | 0.0 | % | 161 |   | 0.0 | % |
| Other                                                                          |       | 218                                                                 |       | 0.1 | % | 268 |   | 0.1 | % | 338 |   | 0.1 | % |
| Total other  expense, net                                                      |       | (5,776                                                              | )          | -1.5 | % | (6,116 | ) | -1.2 | % | (1,460 | ) | -0.2 | % |
| Income before  taxes                                                           |       | 6,804                                                               |       | 1.7 | % | 9,655 |   | 2.0 | % | 22,232 |   | 3.7 | % |
| Income tax  expense                                                            |       | (4,280                                                              | )          | -1.1 | % | (5,098 | ) | -1.0 | % | (8,396 | ) | -1.4 | % |
| Net income                                                                     |       | $                                                                   | 2,524      |   | 0.6 | % | $ | 4,557 |   | 1.0 | % | $ | 13,836 |   | 2.3 | % |
| Earnings per  common share:                                                    |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                          |       | $                                                                   | 0.50       |   |   |   | $ | 0.76 |   |   |   | $ | 1.28 |   |   |   |
| Dilutive                                                                       |       | $                                                                   | 0.43       |   |   |   | $ | 0.68 |   |   |   | $ | 1.25 |   |   |   |
| Shares used in  earnings per share calculation:                                |       |                                                                |       |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                          |       | 5,038                                                               |       |   |   | 5,970 |   |   |   | 10,773 |   |   |   |
| Dilutive                                                                       |       | 5,878                                                               |       |   |   | 6,697 |   |   |   | 11,072 |   |   |   |

----

(1)          Includesmanagement fees expense of $386 and $2,456 for our fiscal years endedSeptember 30, 2004 and 2005, respectively, as a result of payments to BRSand Agri Beef Co. The management and consulting services agreement wasterminated in August 2005 for a termination fee of $2,000 that is includedin the management fee expense of $2,456 for fiscal year endedSeptember 30, 2005.

(2)          Includesaccretion of our Series A preferred stock dividends, which isnondeductible for income tax purposes. Accretion expense included as acomponent of interest expense was $4,239 and $4,055 for 

29

----

our fiscal yearsended September 30, 2004 and 2005, respectively. We used a portion of theproceeds from our initial public offering in August 2005 to redeem all theSeries A preferred stock.

**Fiscal 2006Compared to Fiscal 2005**

*TotalRevenues.*   Total revenues increased$109,539, or 22.1%, to $606,194 for the fiscal year ended September 30,2006 from $496,655 for the fiscal year ended September 30, 2005. Thisincrease was attributable to an increase in product sales volumes of a widevariety of products to both existing and new customers. Revenues attributableto new customers represented approximately 48.5% of the growth in totalrevenues during the fiscal year ended September 30, 2006. Revenuesattributable to existing customers represented approximately 51.5% of thegrowth in total revenues during the fiscal year ended September 30, 2006.For the purpose of calculating growth rates of new and existing customerrevenue, we have defined a new customer as a customer that did not purchaseproduct from us in the corresponding fiscal quarter of the prior year, with theremaining customer base being considered an existing customer. Revenues fromnew customers for each fiscal quarter are summed to arrive at the estimatedyear-to-date revenue for new customers. Contributing to the growth in revenuesto both new and existing customers for the fiscal year ended September 30,2006 as compared to the prior fiscal year was the addition of non-steroidalanti-inflammatory drugs for dogs, the addition of new cattle antibiotics andthe conversion to a “buy/sell” arrangement for an equine West Nile Virusvaccine that was a commission-based agency relationship for part of the priorfiscal year. The integration of Northland in the third quarter of the fiscalyear ended September 30, 2006 contributed to new customer revenue growthof approximately $4,200 for the year. Additionally, the fiscal year 2006included four quarters of revenues resulting from the acquisition of nearly allthe assets of Vetpo in January 2005. Fiscal year 2005 included only threequarters of such revenues.

Commission revenues increased $2,872, or 58.5%, to$7,782 for the fiscal year ended September 30, 2006 from $4,910 in theprior fiscal year. The increase of commission revenues was due to the increasein gross agency billings of $48,493, or 47.1%, to $151,376 for the fiscal yearended September 30, 2006 from $102,883 in the prior fiscal year.

*GrossProfit.*   Gross profit increased $18,180,or 26.0%, to $88,126 for the fiscal year ended September 30, 2006 from$69,946 for the fiscal year ended September 30, 2005. The increase ingross profit is a result of increased total revenues as discussed above and increasedvendor rebates. Vendor rebates contributed to the gross profit dollarimprovement by approximately $5,900 for the fiscal year endedSeptember 30, 2006 as compared to the fiscal year ended September 30,2005. Vendor rebates have historicallybeen highest during our first fiscal quarter ended December 31, sincecertain significant vendor rebate programs were designed to include annualtargets to be achieved based on the calendar year. Vendor modifications torebate programs from annual-weighted calendar year growth targets to eitherquarterly or trimester growth targets resulted in a shift of rebate dollarsthat historically would have been earned in our first quarter of fiscal year2007 ending December 31, 2006 to be earned in the fiscal year 2006. Thegrowth in vendor rebates during the 2006 fiscal year included approximately$2.5 million ($1.5 million after-tax) due to this shift in the timing ofrebates. The additional growth was attributable to our sales growth with keyvendors and the addition of new programs related to new product offerings.

Gross profit as a percentage of total revenues was14.5% for the fiscal year ended September 30, 2006, compared to 14.1% forthe prior fiscal year. The increase in our gross profit as a percentage oftotal revenues was primarily due to an increase in vendor rebates andcommission revenue on agency products sold. Partially offsetting theseimprovements were increases in freight costs as a result of higher fuel andtransportation costs.

*Selling,General and Administrative Expenses (“SG&A”).*   SG&Aexpenses increased $9,823, or 18.7%, to $62,470 for the fiscal year endedSeptember 30, 2006 from $52,647 for the fiscal year ended 

30

----

September 30, 2005.This increase was primarily due to increased compensation costs, outside feesand services, location and travel and occupancy costs. Compensation costsincreased due to the addition of 123 employees primarily in our distributioncenters, corporate office and sales force. Additionally, the increase incompensation cost was impacted by 50 employees that joined us inJanuary 2005 in connection with the acquisition of Vetpo and the 17employees that joined us in May 2006 as a result of the Northlandacquisition. Compensation costs also increased as a result of increased salescommissions that are directly correlated with the sales growth. The increase inoutside fees and services was primarily due to our use of a temporary workforceto support our sales growth and demand in our distribution centers, increasedprofessional services fees related to operating as a public company andincreased credit card and other bank fees. Increases in location and travelcosts are due to increased headcount and costs associated with supporting oursales growth. Increases in occupancy costs are due primarily to the relocationof our distribution centers in Nampa, Idaho and Denver, Colorado from ownedproperties to leased properties; the opening of our new distribution center inOrlando, Florida, and the leased facilities used as a result of the Vetpo andthe Northland acquisitions. SG&A as a percentage of revenue was 10.3% forthe fiscal year ended September 30, 2006, down from 10.6% for the fiscalyear ended September 30, 2005. The decrease was primarily due to a $2,000pre-tax charge incurred in August 2005 for the termination of a managementand consulting services agreement, partially offset by the increase in outsidefees and services and location costs.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased $436, or 28.5%, to $1,964 for the fiscalyear ended September 30, 2006 from $1,528 for the fiscal year endedSeptember 30, 2005. Depreciation expense increased as a result of thedistribution center equipment upgrades at our Nampa, Idaho and Denver, Coloradofacilities in April 2005 and December 2005, respectively, and as aresult of the equipment we acquired in the purchases of Vetpo and Northland andthe new distribution center opened in June 2006 in Orlando, Florida. Inaddition, amortization expense increased as a result of intangible assetsacquired in the purchases of Vetpo and Northland.

*OtherExpenses.*   Other expenses decreased$4,656, or 76.1%, to $1,460 for the fiscal year ended September 30, 2006from $6,116 for the fiscal year ended September 30, 2005. The decrease inother expenses was primarily due to a reduction in interest expense of $4,556in the fiscal year ended September 30, 2006 as compared to the same periodin the prior year. Included in interest expense for the fiscal year endedSeptember 30, 2005 is accretion of dividends on the Series Apreferred stock of $4,055. The Series A preferred stock was redeemed inAugust 2005.

*Income Tax Expense.**  *Oureffective tax rate was 37.8% for the fiscal year ended September 30, 2006and 52.8% for the fiscal year ended September 30, 2005. The decrease wasprimarily a result of the elimination of the non-deductible accretion ofdividends on the Series A preferred stock that was redeemed inAugust 2005, as well as a decrease in the state income taxes related tothe utilization of state tax credits.

**Fiscal 2005Compared to Fiscal 2004**

*TotalRevenues.**  *Totalrevenues increased $102,373, or 26.0%, to $496,655 for the fiscal year endedSeptember 30, 2005 from $394,282 for the fiscal year endedSeptember 30, 2004. This increase was attributable to an increase inproduct sales volumes of a wide variety of products to both existing and newcustomers. Revenues attributable to new customers represented approximately 57%of the growth in total revenues in the fiscal year ended September 30,2005. Revenues attributable to existing customers represented approximately 43%of the growth in total revenues during the fiscal year ended September 30,2005. For the purpose of calculating growth rates of new and existing customerrevenue, we have defined a new customer as a customer that did not purchaseproduct from us in the corresponding fiscal quarter of the prior year, with theremaining customer base being considered an existing customer. Revenues fromnew customers for each fiscal quarter are summed to arrive at the estimatedfiscal year revenue for new 

31

----

customers. OnJanuary 3, 2005, we acquired substantially all the assets of Vetpo. Fromthe acquisition date through September 30, 2005, the field salesrepresentatives who joined us from Vetpo produced sales of approximately$13,700. This acquisition has enabled us to substantially expand our marketpresence in Michigan, Illinois, Indiana, Ohio and Wisconsin. Revenues improvedin 2005 as compared to the prior year as a result of the conversion to a“buy/sell” arrangement for an equine West Nile Virus vaccine that was acommission-based agency relationship in the prior year, the addition of newcattle antibiotics and the addition of a leading non-steroidalanti-inflammatory drug for dogs. We increased the number of field salesrepresentatives to 134 at September 30, 2005 from 111 atSeptember 30, 2004, allowing us to target additional customers and toextend geographic reach, principally in the Northeast and Southeast regions ofthe United States.

Commission revenues increased $654, or 15.4%, to$4,910 for the fiscal year ended September 30, 2005 from $4,256 in thefiscal year 2004. The increase of commission revenues was due to the increasein gross agency billings of $16,226, or 18.7%, to $102,883 for the fiscal yearended September 30, 2005 from $86,657 in the fiscal year 2004.

*GrossProfit.*   Gross profit increased by$14,348, or 25.8%, to $69,946 for the fiscal year ended September 30, 2005from $55,598 for the fiscal year ended September 30, 2004. Vendor rebatescontributed to the gross profit improvement by $2,699 for the year endedSeptember 30, 2005 as compared to the prior year. Gross profit as apercentage of total revenues for the year ended September 30, 2005 was14.1%, the same as the prior year.

*Selling,General and Administrative Expenses.*   SG&Aexpenses increased by $10,775, or 25.7%, to $52,647 for the fiscal year endedSeptember 30, 2005 from $41,872 for the fiscal year endedSeptember 30, 2004. SG&A expenses as a percentage of total revenuesfor the year ended September 30, 2005 remained consistent with that of theprior year at 10.6% of total revenues. During the fourth quarter endedSeptember 30, 2005, we incurred a $2,000 charge related to the terminationof a management services and consulting agreement. This charge contributed tothe increase in SG&A expense, both in dollars and as a percentage of totalrevenues. Partially offsetting this charge, SG&A expenses for the yearbenefited from increased sales leverage. The dollar increase for the fiscalyear ended September 30, 2005 was also due to increased compensationcosts, outside fees and services, location and travel costs, and occupancycosts. Compensation costs increased due to the addition of 98 employees duringthe year. Compensation costs also increased as a result of increased salescommissions that are directly correlated with our sales growth and annualperformance wage increases. The increase in outside fees and services wasprimarily due to increased credit card and other bank fees, increased use of atemporary workforce to support our sales growth in our distribution centerfacilities and increased professional services fees related to our efforts tobecome a public company. Increases in location, travel and occupancy costs weredue to the increased number of employees and increased sales volume, theopening of a new facility in Harrisburg, Pennsylvania in April 2004 andthe facility we acquired in the Vetpo acquisition located in Holland, Michigan.Management fees included in SG&A expenses were $2,456 for the fiscal yearended September 30, 2005, compared to $386 for the prior fiscal year andare the result of a management and consulting services agreement between us,BRS and Agri Beef Co. that was terminated in August 2005.

*Depreciationand Amortization.**  *Depreciationand amortization expense increased 33.3%, or $382, to $1,528 for the fiscalyear ended September 30, 2005 from $1,146 for the fiscal year endedSeptember 30, 2004. This increase was due primarily to amortization ofintangible assets acquired with the purchases of Vetpo and Memorial Pet Care.In addition, depreciation expense increased as a result of the new facilitiesin Harrisburg, Pennsylvania; Holland, Michigan; and Nampa, Idaho.

*OtherIncome (Expense).*   Other expensesincreased $340, or 5.9%, to $6,116 for the fiscal year ended September 30,2005 from $5,776 for the fiscal year ended September 30, 2004. Theincrease in other expenses was primarily due to an increase in interest expenseof $417 to $6,515 for the fiscal year ended 

32

----

September 30, 2005from $6,098 for the prior fiscal year. Included in interest expense is theaccretion of dividends on the Series A preferred stock of $4,055 and$4,239 for the fiscal year ended September 30, 2005 and for the fiscalyear ended September 30, 2004, respectively, that was redeemed inAugust 2005 with a portion of the proceeds from our initial publicoffering.

*Income Tax*Expense.   Oureffective income tax rate was 52.8% and 62.9% for the fiscal years endedSeptember 30, 2005 and 2004, respectively. The decrease in the effectivetax rate was primarily attributable to the lower nondeductible accretion ofdividends on the Series A preferred stock for the fiscal year endedSeptember 30, 2005 due to the redemption of all of the Series Apreferred stock in August 2005 and due to actual state income tax expensebeing less than estimated due to the utilization of state tax credits.

**Seasonality inOperating Results**

Our quarterly sales and operating results have variedsignificantly in the past, and will likely continue to do so in the future.Historically, our total revenues have typically been higher during the springand fall months due to increased sales of production animal products. Productuse cycles for production animal products are directly related to medicalprocedures performed by veterinarians on production animals during the springand fall months. These buying patterns can also be affected by vendors’ anddistributors’ marketing programs launched during the summer months,particularly in June, which can cause veterinarians to purchase productionanimal health products earlier than those products are needed. This kind ofearly purchasing may reduce our sales in the months these purchases would haveotherwise been made. See “Risk Factors—Our quarterly operating results mayfluctuate significantly, and these fluctuations may cause our stock price tofall.” Additionally, while we accrue rebates as they are earned, our rebateshave historically been highest during the quarter ended December 31, sincesome of our vendors’ rebate programs were designed to include targets to beachieved near the end of the calendar year. Early in calendar year 2006, certain of our vendors modified their rebateprograms with us. These rebate program modifications changed the revenue growthtargets from annual-weighted calendar year targets to either quarterly ortrimester growth targets. These modifications resulted in rebates previouslyexpected to be earned and recognized in our first fiscal quarter of 2007 endingon December 31, 2006 to be recognized in our fiscal year 2006.

Our companion animal products tend to have a differentproduct use cycle that minimally overlaps with that of production animalproducts. In the companion animal market, sales of flea, tick and mosquitoproducts are highest during the spring and summer months. The differing productuse cycles of companion animal products partially offsets the seasonality wetypically experience due to our sales of production animal products.

33

----

Forthe reasons and factors discussed above our quarterly operating results mayfluctuate significantly. Accordingly, results for any one quarter are notnecessarily indicative of results to be expected for any other quarter or forany year and our sales for any particular future period may decrease. In thefuture, operating results may fall below the expectations of securitiesanalysts and investors. If this occurs, the price of our stock would likelydecrease.

| ** **                                   | ** ** | **Dec. 31,**                                     | ** ** | **Mar. 31,** | ** ** | **Jun. 30,** | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** | **Mar. 31,** | ** ** | **Jun. 30,** | ** ** | **Sept. 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **2004**                                              | ** ** | **2005**          | ** ** | **2005**          | ** ** | **2005**           | ** ** | **2005**          | ** ** | **2006**          | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| ** **                                   | ** ** | **(In thousands, except per  share amounts)**(1) | ** ** |
| Revenues:                                    |       |                                                  |       |              |       |              |       |               |       |              |       |              |       |              |       |               |       |
| Product sales                                |       | $                                                     | 101,260    |              | $          | 108,888           |       | $                  | 130,377    |              | $          | 122,747           |       | $                 | 127,048    |               | $          | 133,255 |   | $ | 154,295 |   | $ | 149,692 |   |
| Product sales to related party               |       | 6,805                                                 |       | 6,142             |       | 6,433             |       | 9,093              |       | 9,355             |       | 8,001             |       | 7,467             |       | 9,300              |       |
| Commissions                                  |       | 929                                                   |       | 1,380             |       | 1,177             |       | 1,424              |       | 1,413             |       | 2,093             |       | 2,190             |       | 2,085              |       |
| Total revenues                               |       | 108,994                                               |       | 116,410           |       | 137.987           |       | 133,264            |       | 137,816           |       | 143,349           |       | 163,952           |       | 161,077            |       |
| Cost of product sales                        |       | 92,370                                                |       | 99,938            |       | 119,955           |       | 114,446            |       | 115,064           |       | 123,421           |       | 141,041           |       | 138,542            |       |
| Gross profit                                 |       | 16,624                                                |       | 16,472            |       | 18,032            |       | 18,818             |       | 22,752            |       | 19,928            |       | 22,911            |       | 22,535             |       |
| Selling, general and administrative expenses |       | 11,016                                                |       | 12,803            |       | 13,217            |       | 15,611             |       | 14,553            |       | 15,159            |       | 16,389            |       | 16,429             |       |
| Depreciation and amortization                |       | 340                                                   |       | 387               |       | 393               |       | 408                |       | 442               |       | 473               |       | 495               |       | 554                |       |
| Operating income                             |       | 5,268                                                 |       | 3,282             |       | 4,422             |       | 2,799              |       | 7,757             |       | 4,296             |       | 6,027             |       | 5,552              |       |
| Other income (expense):                      |       |                                                  |       |              |       |              |       |               |       |              |       |              |       |              |       |               |       |
| Interest expense                             |       | (1,769                                                | )          | (1,776            | )          | (1,849            | )          | (1,120             | )          | (555              | )          | (578              | )          | (466              | )          | (361               | )          |
| Earnings of equity method investees          |       | 32                                                    |       | 27                |       | 30                |       | 42                 |       | 45                |       | 37                |       | 35                |       | 44                 |       |
| Other                                        |       | 67                                                    |       | 57                |       | 60                |       | 83                 |       | 90                |       | 137               |       | 84                |       | 88                 |       |
| Total other expense                          |       | (1,670                                                | )          | (1,692            | )          | (1,759            | )          | (995               | )          | (420              | )          | (404              | )          | (347              | )          | (229               | )          |
| Income before taxes                          |       | 3,598                                                 |       | 1,590             |       | 2,663             |       | 1,804              |       | 7,337             |       | 3,892             |       | 5,680             |       | 5,323              |       |
| Income tax expense                           |       | (1,942                                                | )          | (995              | )          | (1,256            | )          | (905               | )          | (2,898            | )          | (1,537            | )          | (1,911            | )          | (2,049             | )          |
| Net income                                   |       | $                                                     | 1,656      |              | $          | 595               |       | $                  | 1,407      |              | $          | 899               |       | $                 | 4,439      |               | $          | 2,355 |   | $ | 3,769 |   | $ | 3,274 |   |
| Earnings per common  share:                  |       |                                                  |       |              |       |              |       |               |       |              |       |              |       |              |       |               |       |
| Basic                                        |       | $                                                     | 0.33       |              | $          | 0.12              |       | $                  | 0.28       |              | $          | 0.10              |       | $                 | 0.42       |               | $          | 0.22 |   | $ | 0.36 |   | $ | 0.29 |   |
| Dilutive                                     |       | $                                                     | 0.28       |              | $          | 0.10              |       | $                  | 0.24       |              | $          | 0.10              |       | $                 | 0.41       |               | $          | 0.22 |   | $ | 0.35 |   | $ | 0.28 |   |

----

(1)           The sums of the quarterly line items maynot agree to the year-to-date amounts as a result of rounding.

**Liquidity andCapital Resources**

Our principal sources of liquidity are cash flowsgenerated from operations and borrowings on our revolving credit facility underthe amended credit agreement. We use capital primarily to fund day-to-dayoperations and to maintain sufficient inventory levels in order to promptlyfulfill customer orders and to expand our operations and sales growth. We believe our capital resources will besufficient to meet our anticipated cash needs for at least the next twelvemonths.

On August 3, 2005, we completed our initialpublic offering in which we sold an aggregate of 4,983,334 shares (includingthe exercise of the underwriters’ over-allotment option) of our common stock ata price of $17 per share. We received net proceeds of $77,159 after deductingthe underwriting discounts and offering expenses. We used the net proceeds toredeem all of our Series A preferred stock for approximately $39,789 andto repay approximately $37,370 of borrowings outstanding on our revolvingcredit facility under our amended credit agreement.

In the fourth quarter ended September 30, 2006,we issued 908,846 shares (including the shares issued upon the partial exerciseof the underwriters’ over-allotment option) of our common stock at a price of 

34

----

$32.25 per share. We usednet proceeds of $27,341 received from this offering to pay down our borrowingson our revolving credit facility.

*OperatingActivities.*   For fiscal year ended September 30,2006, cash used in operating activities was $7,751, and was primarilyattributable to an increase in receivables of $21,022 and inventories of$15,114. This amount was partially offset by net income of $13,836 and anincrease in accounts payable of $12,839. The increase in net income is a resultof the factors discussed above in “Results of Operations”. The increase inaccounts receivable is primarily related to the increase in sales and thecontinued offering of extended payment terms to production animal veterinariansin response to market conditions. The increased levels of inventory andaccounts payable are related to purchases to correspond to increased sales;purchases to achieve target volumes and service levels; and purchases relatedto the new distribution center acquired in the Northland acquisition and theopening of a new distribution center located in Orlando, Florida.

For fiscal year ended September 30, 2005, cashused in operating activities was $5,611 and was primarily attributable toincreases in inventories of $17,334 and accounts receivable of $15,276. Thisamount was partially offset by an increase in accounts payable of $15,837,non-cash accretion of the Series A preferred stock dividends of $4,055(included in interest expense) and net income of $4,557. The increased levelsof inventory and accounts payable resulted from moving certain products we sellfrom a commission-based agency arrangement to a “buy/sell” arrangement,increased sales growth requiring higher levels of inventory and new productofferings. Increased accounts receivables are directly related to the increasein sales. Additionally, we provided extended payment terms to production animalveterinarians in June and July of 2005 in response to marketconditions.

For fiscal year ended September 30, 2004, netcash used by operating activities was $13,889 and was primarily attributable toincreases of $12,668 in inventories and $10,071 in accounts receivable. Theincrease in inventories was primarily related to supporting increased salesgrowth and adding a distribution center in Harrisburg, Pennsylvania. Duringthis time period, we offered extended payment terms to production animalveterinarians in response to market conditions and experienced increased salesthat led to the increase in accounts receivable balances. The increase ininventories and accounts receivable were partially offset by non-cash accretionof the Series A preferred stock dividends of $4,239 (included in interestexpense) and net income of $2,524.

*InvestingActivities.**  *For fiscal year ended September 30, 2006, netcash used in investing activities was $6,065. Significant transactionsimpacting cash used in investing activities include the acquisition ofNorthland for $3,551 and capital expenditures of $3,663 primarily related tothe relocation of our existing distribution center to a new larger distributioncenter in Denver, Colorado, the opening of a new distribution center inOrlando, Florida and the expansion of the Northland facility. Additionally, wecompleted the sale of a distribution center previously operated in Denver,Colorado for $1,455.

For fiscal year ended September 30, 2005, netcash used in investing activities was $6,529 and was primarily attributable tothe acquisition of certain assets of Vetpo and Memorial Pet Care, Inc. Inaddition, in April 2005, we relocated from an existing distribution centerfacility to a larger distribution center facility in Nampa, Idaho. The capitalexpenditures for the equipment for this facility were approximately $657. We alsobegan the relocation of our Denver, Colorado distribution center to a new,larger, 58,737 square-foot facility that was opened in December 2005.

Net cash used in investing activities was $1,251 forour fiscal year ended September 30, 2004 and was primarily attributable toinvestments in equipment, including the purchase of office, distribution centerand computer equipment. In November 2003, we relocated from an existingdistribution center facility to a larger distribution center facility inVisalia, California. In December 2003, we signed a new distribution centerlease for a Harrisburg, Pennsylvania location. Also in 2004, we upgraded ourenterprise information system which was effective July 2004.

35

----

*FinancingActivities.**  *For fiscal year ended September 30, 2006, netcash provided by financing activities was $13,822, and was primarilyattributable to net proceeds of $27,341 from the issuance of 908,846 shares ofcommon stock in our follow-on offering completed in the fourth quarter ended September 30,2006. The proceeds were primarily used to reduce outstanding debt under ourrevolving credit facility.

For fiscal year ended September 30, 2005 net cashprovided by financing activities was $12,143 and was primarily due to the netproceeds of $77,159 received from our initial public offering in August 2005.These proceeds were used to redeem all of our Series A preferred stock for$39,789 and to repay approximately $37,370 of borrowings outstanding on ourrevolving credit facility under our amended credit agreement.

For fiscal year ended September 30, 2004 net cashprovided by financing activities was $15,132 which was primarily due toborrowings from and payments under our revolving credit facility, which is usedto finance our working capital requirements and fluctuates based on timing ofpayables and collection of receivables.

*CapitalResources.**  *We have aline-of-credit agreement with two lenders for a credit facility that allows forborrowings up to $70,000. The line-of-credit is secured by a security interestin substantially all of our assets and terminates on June 18, 2007. Interest is due monthly at thefollowing rates: 1) London Interbank Offered Rate (“LIBOR”) plus a margin(7.07% as of September 30, 2006), at our option; or 2) the prime rate(8.25% at September 30, 2006). The lenders also receive an unusedline fee and letter of credit fee equal to 0.375% of the unused amount of therevolving credit facility. Our outstanding balance on this facility at September 30,2006 was $10,559 which carried an interest rate at the prime rate. Theline-of-credit contains certain restrictive financial covenants as well asrestrictions on dividend payments and future debt borrowings. In the fourthquarter of fiscal year 2006, we used the proceeds from our follow-on offeringof shares of common stock to pay down ourrevolving credit facility which will reduce our interest expense in futureperiods.

From time to time we issue letters of credit to act asguarantee of payment to specified third parties. At September 30, 2006, wehad eleven letters of credit totaling $780 and at September 30, 2005 wehad three letters of credit totaling $300. There were no outstanding borrowingson these letters of credit at September 30, 2006 or 2005.

In January 2005, weissued a promissory note in the aggregate principal amount of $487 inpartial consideration for the purchase of substantially all the assets ofVetpo. The note bears interest at the prime rate, payable quarterly. Theprincipal of the note is payable in five equal annual installments, beginningon January 1, 2006. At September 30, 2006 we owed $389 on this note payable.

36

----

**Contractual Obligations**

*Contractual Obligations*

Ourcontractual obligations at September 30, 2006 mature as follows (inthousands):

| ** **                                              | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **Total**                                 | ** ** | **1 Year or less** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **More than 5 Years** | ** ** |
| Line-of-credit to  banks(1)                             |       | $                                         | 10,559     |   |   | $ | 10,559 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   |
| Operating lease  commitments(2)                         |       | 9,841                                     |       |   | 2,016 |   |   |   | 3,537 |   |   |   | 2,607 |   |   |   | 1,681 |   |   |
| Long-term debt  obligations (including current portion) |       | 389                                       |       |   | 97 |   |   |   | 195 |   |   |   | 97 |   |   |   | — |   |   |
| Interest on  long-term debt and line-of-credit(3)       |       | 831                                       |       |   | 801 |   |   |   | 28 |   |   |   | 2 |   |   |   | — |   |   |
| Other long-term  obligations                            |       | 467                                       |       |   | 186 |   |   |   | 265 |   |   |   | 16 |   |   |   | — |   |   |
| Total contractual  obligations                          |       | $                                         | 22,087     |   |   | $ | 13,659 |   |   |   | $ | 4,025 |   |   |   | $ | 2,722 |   |   |   | $ | 1,681 |   |   |

----

(1)          Forthe purposes of the table above the line-of-credit is assumed to be paid at thecredit facility’s termination date of June 18, 2007.

(2)          InNovember 2006 we leased approximately 16,000 square foot of additionaldistribution center space located in Denver, Colorado with an incrementalaverage annual lease of $72 per year and expiring in 2013. In November 2006we renewed one lease agreement and entered into a second lease agreement for acombined 19,500 square foot distribution center located in Phoenix, Arizonawith an average annual lease expense of $115 per year and expiring in 2009.

(3)          Futureinterest payments are calculated based on the assumption that all debt isoutstanding until maturity. For debt instruments with variable interest ratesand unused commitment fees, interest has been calculated for all future periodsusing the rates in effect at September 30, 2006.

*Guarantees*

We provide guarantees,indemnifications and assurances to others in the ordinary course of ourbusiness. We have evaluated our agreements that contain guarantees andindemnification clauses in accordance with the guidance of Financial AccountingStandards Board (“FASB”) Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness of Others*.

We enter into a wide rangeof indemnification arrangements in the ordinary course of business. Theseinclude tort indemnities, tax indemnities, indemnities against third partyclaims arising out of arrangements to provide services to us, indemnities inmerger and acquisition agreements and indemnities in agreements related to thesale of our securities. Also, our governance documents and the governancedocuments of substantially all of our subsidiaries provide for theindemnification of individuals made party to any suit or proceeding by reasonof the fact that the individual was acting as an officer, director or agent ofthe relevant company or as a fiduciary of a company-sponsored welfare benefitplan. We also provide guarantees and indemnifications for the benefit of ourwholly-owned subsidiaries for the satisfaction of performance obligations,including certain lease obligations. It is difficult to quantify the maximumpotential liability under these indemnification arrangements; however, at September 30,2006 we were not aware of any material liabilities arising from theseindemnification arrangements.

**Inflation**

Most of our operatingexpenses are inflation-sensitive, with inflation generally producingincreased costs of operations. During the past three years, the most significanteffects of inflation have been on employee wages, costs of products andfuel-intensive costs including freight, packing supplies and travel. 

37

----

Wemanaged the effects of inflation by controlling increases in compensationexpense, renegotiating freight carrier contracts and utilizing a central sourcefor warehouse shipping supplies.

**Critical Accounting Policies**

Our discussion and analysis of ourfinancial condition and results of operations are based upon our consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses and relateddisclosure of contingent assets and liabilities. On an ongoing basis, weevaluate our estimates, including those related to sales returns, allowance fordoubtful accounts, customer incentives, vendor rebates, inventories, goodwilland intangible assets, income taxes, impairment of long-lived assets,depreciation and amortization, employee benefits, unearned income andcontingencies. We base our estimates on historical experience and on variousother assumptions and factors that are believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. We, based on our ongoing review, will make adjustments toour judgments and estimates where facts and circumstances dictate.Historically, actual results have not significantly deviated from thosedetermined using the estimates described above.

We believe the following critical accounting policies are importantto understand our financial condition and results of operations and requiremanagement’s most difficult, subjective or complex judgments, often as a resultof the need to make estimates about the effect of matters that are inherentlyuncertain.

***Revenue Recognition***

We sell products that wesource from vendors to our customers through either a “buy/sell” transaction oran agency relationship with our vendors. In a “buy/sell” transaction, we purchase andtake inventory of products from the vendor. When a customer places an orderwith us, we pick, pack, ship and invoice the customer for the order. Werecognize revenue from “buy/sell” transactions as product sales when theproduct is delivered to the customer. We accept product returns from ourcustomers. We estimate sales returns based on historical experience, andreturns are recognized as a reduction of product sales. Product returns havenot been significant to our financial statements. In an agency relationship, wegenerally do not purchase and take inventory of products from our vendors. Wereceive an order from a customer, transmit the order to the vendor, who picks,packs and ships the order to the customer. In some cases, the vendor invoicesand collects payment from the customer, while in other cases we invoice andcollect payment from the customer on behalf of the vendor. We receive acommission payment for soliciting the order from the customer and for providingother customer service activities. Commissions are recognized when the servicesupon which the commissions are based are complete.

***Vendor Rebates***

Vendor rebates arerecorded based on the terms of the contracts with each vendor and in accordancewith the provisions of Emerging Issues Task Force (“EITF”) Issue No. 02-16,*Accounting by a Customer (Including aReseller) for Certain Consideration Received from a Vendor.* Wereceive quarterly, trimester, semi-annual and annual performance-basedrebates from third-party vendors based upon attainment of certain sales and/orpurchase goals. Sales rebates are classified in our accompanying consolidatedstatements of income as a reduction to cost of product sales at the time thesales performance measures are achieved. Purchase rebates are measured againstinventory purchases from the vendors and are a reduction of inventory until theproduct is sold. When the inventory is sold, purchase rebates are recognized asa reduction to cost of product sales.

38

----

Historically, actualresults have not significantly deviated from those determined using theestimates described above. We expect that our estimates in the future willcontinue to be reasonable as our rebates are based on specific vendor programgoals and are principally recorded upon achievement of sales performancemeasures. Vendors may change rebate programs from year to year.

***Customer Incentives***

Customer incentives are accrued based on the terms ofthe contracts with each customer and in accordance with the provisions of EITFIssue No. 01-9, *Accounting forConsideration Given by a Vendor to a Customer (Including a Reseller of theVendor’s Products).* These incentive programs provide that thecustomer receives an incentive based on their product purchases or attainmentof performance goals. Incentives are estimated based on the specific terms ineach agreement, historical experience and product growth rates.

***Goodwill***

Weassess the potential impairment of goodwill annually and on an interim basiswhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable. Factors that we consider important and may trigger aninterim impairment review include:

·       significantunderperformance relative to expected historical or projected future operatingresults;

·       significantchanges in the manner of our use of acquired assets or the strategy of ouroverall business; and

·       significantnegative industry or economic trends.

If we determine throughthe impairment review process that goodwill is impaired, an impairment chargeis recognized in our consolidated statement of income.

Goodwill was evaluated forimpairment in our fourth quarter of 2006 and we determined that the recordedamount was not impaired. The fair value calculations used for these testsrequire us to make assumptions about items that are inherently uncertain.Assumptions related to future market demand, market prices and product costscould vary from actual results, and the impact of such variations could bematerial. Factors that could affect the assumptions include changes in economicconditions, changes in government regulations, success in marketing productsand competitive conditions in our industry. The factors that most significantlyaffect the fair value calculation are market multiples and estimates of futurecash flows. Fair value was determined by management primarily using thediscounted cash flow method.

***Stock Options***

Effective October 1,2005, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised), *Share-Based Payment*(“SFAS 123-R”) for our share-based compensation plans using the modifiedprospective method. We previously accounted for these plans under therecognition and measurement principles of Accounting Principles Board Opinion (“APB”)No. 25, *Accounting for Stock Issued toEmployees* and related interpretations (collectively “APB 25”) anddisclosure requirements established by SFAS No. 123,*Accounting for Stock-based Compensation,*as amended by SFAS No. 148, *Accountingfor Stock Based Compensation—Transition and Disclosure (*“SFAS 148”*).*Under APB 25, no compensation expense was recorded inearnings for our stock-based awards granted under our stock-based award plans.The pro forma effects on net income and earnings per share for stock-basedawards were instead disclosed in a footnote to the financial statements. UnderSFAS 123-R, all share-based compensation is measured at the grant date,based on the fair value of the award, and is recognized as an expense inearnings over the requisite service period. The fair value of a stock award isdetermined using an option valuation model such as the Black-Scholes-MertonOption Pricing Model or a lattice model such as the Binomial Stock OptionPricing Model. These fair value calculations require us to make 

39

----

assumptionsabout items that are inherently uncertain. Assumptions related to futureexpected volatility, life, dividends, risk-free interest rates, forfeitures andother assumptions could vary from actual results, and the impact of suchvariations could be material.

Under the modifiedprospective method, compensation expense includes the expense for allshare-based awards granted prior to, but not yet vested as of October 1,2005 excluding those options initially valued using the minimum value method.At October 1, 2005, all of our options to purchase common stock wereeither vested and exercisable or were initially valued using the minimum valuemethod. Therefore, we have recognized no compensation expense for stock-basedawards in the fiscal year ended September 30, 2006. For the fiscal yearended September 30, 2005, compensation expense that would have beenrecorded had we adopted the fair value method would have been approximately$602. For the fiscal year 2004, compensation expense that would have beenrecorded had we adopted the fair value method (all of which would have beendetermined using the minimum value method) was not significant.

**Recently Issued and New Accounting Pronouncements**

In November 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS 151, *Inventory Costs, anAmendment of ARB No. 43,Chapter 4* (“SFAS 151”). SFAS 151clarifies that inventory costs that are “abnormal” are required to be chargedto expense as incurred as opposed to being capitalized into inventory as aproduct cost. SFAS 151 provides examples of “abnormal” costs which includecosts of idle facilities, excess freight and handling costs and wasted material(spoilage). SFAS 151 was effective for our fiscal year beginning October 1,2005 and did not have a material effect on our consolidated financialstatements.

In December 2004, the FASB issued SFAS 123 R.SFAS 123-R replaces SFAS 123, *Accounting for Stock-basedCompensation* (“SFAS 123”), as amended by SFAS No. 148, *Accounting for Stock Based Compensation—Transition and Disclosure*and supersedes APB No. 25, *Accounting for StockIssued to Employees*. Adoption of SFAS 123-R requires us torecord a non-cash expense for our stock compensation plans using the fair valuemethod. SFAS 123-R was effective for us on October 1, 2005 and theadoption of SFAS 123-R did not have a material effect on our consolidatedfinancial statements.

In December 2004, the FASB issued SFAS 153, *Exchanges of Nonmonetary Assets—An Amendment of APBOpinion No. 29*(“SFAS 153”), which eliminates theexception for nonmonetary exchanges of similar productive assets and replacesit with a general exception for exchanges of nonmonetary assets that do nothave commercial substance. We adopted SFAS 153 as of October 1, 2005 andthe adoption did not have a material effect on our consolidated financialstatements.

In May 2005, the FASBissued SFAS 154, *Accounting Changes andError Corrections*(“SFAS 154”)*.*SFAS 154replaces FASB Statement No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and replaces ABPOpinion No. 20, *Accounting Changes.*SFAS154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005 and will be effective forus for our fiscal year beginning October 1, 2006. The adoption ofSFAS 154 is not expected to have a material effect on our consolidatedfinancial statements.

In September 2005,the Emerging Issues Task Force issued EITF No. 04-13, *Accounting for Purchases and Sales of Inventory withthe Same Counterparty*(“EITF 04-13”). EITF 04-13 requires that purchases and sales ofinventory with the same counterparty be accounted for as a nonmonetarytransaction within the scope of APB Opinion No. 29, *Accounting for Nonmonetary Transactions.*EITF04-13 is effective for new arrangements entered into, or modifications orrenewals of existing arrangements, beginning in the first interim or annualreporting period beginning after March 15, 2006. We adopted EITF 04-13as of April 1, 2006 and the adoption did not have a material effect on ourconsolidated financial statements.

In July 2006, theFASB issued Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which clarifies the accounting foruncertainty in income taxes recognized in the financial statements 

40

----

inaccordance with FASB Statement No. 109, *Accountingfor Income Taxes*. FIN 48 provides guidance on the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. FIN 48 also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosures, and transition. FIN 48 is effective for our fiscal year beginning October 1,2007. We are currently evaluating the impact of this statement on ourconsolidated financial statements.

In September 2006,the FASB issued SFAS 157, *Fair Value Measurements*(“SFAS 157”). SFAS 157 defines fair value, establishes a framework formeasuring fair value according to generally accepted accounting principles, andexpands disclosure requirements regarding fair value measurements. Thisstatement emphasizes that fair value should be determined based on assumptionsmarket participants would use to price the asset or liability. SFAS 157 iseffective for our fiscal year and interim period beginning October 1, 2008.We are currently evaluating the impact, if any, that SFAS 157 will have on ourconsolidated financial statements.

In September 2006,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108(“SAB 108”) which provides guidance on quantifying and evaluating themateriality of unrecorded misstatements. SAB 108 is effective for our fiscalyear beginning October 1, 2007. We are currently evaluating the impact, ifany, that this guidance will have on our consolidated financial statements.

**Credit Agreement**

We have a line-of-credit agreement with two lenders for a creditfacility that allows for borrowings up to $70,000. The line-of-credit issecured by a security interest in substantially all of our assets andterminates on June 18, 2007. Interest is due monthly at the followingrates: 1) LIBOR plus a margin (7.07% as of September 30, 2006), at ouroption; or 2) the prime rate (8.25% at September 30, 2006). Our effectiveborrowing rate was the prime rate as of September 30, 2006.

The lenders also receive an unused line fee and letter of creditfee equal to 0.375% of the unused amount of the revolving credit facility. Ouroutstanding balance on this facility at September 30, 2006 and 2005 was$10,559 and $24,690, respectively. The line-of-credit contains certainrestrictive financial covenants as well as restrictions on dividend paymentsand future debt borrowings. The credit agreement allows us to issue up to$10,000 in letters of credit. The letters of credit typically act as guaranteeof payment to certain third parties in accordance with specified terms andconditions. We had eleven letters of credit totaling $780 and three letters ofcredit totaling $300 at September 30, 2006 and 2005, respectively. Therewere no outstanding borrowings on these letters of credit at September 30,2006 or 2005.

As part of the credit agreement, we were required to maintain aninterest rate swap on a minimum notional amount of $12,000 of borrowings underour revolving credit facility. On July 7, 2004 and 2003, we entered intointerest rate swap agreements for $12,000 of our line-of-credit borrowings.Under the swaps, we received interest at a floating rate based on LIBOR andpaid interest at a fixed rate of 2.49% and 1.33%, respectively. Net paymentsdue under the swaps were settled monthly and the swaps expired on July 7,2005 and 2004, respectively. We received a waiver from our lenders for therequirement to maintain an interest rate swap effective as of July 7,2005.

**Promissory Note**

In January 2005, weissued a promissory note in the aggregate principal amount of $487 in partialconsideration for the purchase of substantially all the assets of Vetpo. Thenote bears interest at the prime rate, payable quarterly. The principal of thenote is payable in five equal annual installments, beginning on January 1,2006. At September 30, 2006 we owed $389 on this note payable.

41

----

**Off Balance Sheet Arrangements**

At September 30, 2006we had no significant investments that were accounted for under the equitymethod in accordance with accounting principles generally accepted in theUnited States except for Feeders Advantage. Feeders Advantage has noliabilities associated with them that were guaranteed by or that would beconsidered material to us. Accordingly, we do not have any off balance sheetarrangements with unconsolidated entities.

**New or Extended Agreements**

On November 15, 2006,we and Medical Management International Inc, dba Banfield, The Pet Hospital (“Banfield”)signed contracts to extend our supply and logistics agreements. The newcontracts are effective as of December 1, 2006 through November 30,2009, and can be terminated by either party with or without cause upon 150 daysprior written notice. These contracts provide that we will be the supplier oflogistics to Banfield, and govern the pricing, shipping and other terms andconditions under which the company sells products and provides services toBanfield. Under the Agreement for Product Purchases, we provide a limitedwarranty with respect to all goods sold by us and paid for by Banfield thatgood title to the products is conveyed, that the products are delivered free ofany security interest, that the products will conform to the description, gradeand condition of the products invoiced and that all products will be free ofany defects arising while the products are either in our possession or controlor in the control of any carrier transporting the goods from us to Banfield. Weare also required to maintain insurance in an amount equal to at least thereplacement cost of all property that is purchased by Banfield from thirdparties and is held by us on their behalf.

On November 16, 2006, we and Merial Limited (“Merial”)entered into a 2007-2008 Merial Independent Sales Agent Agreement,effective as of January 1, 2007. Under the 2007-2008 MerialIndependent Sales Agent Agreement, Merial appoints us to sell, market andprovide services related to Merial’s companion animal products to the veterinarytrade. In return, we are entitled to receive commissions. The agreement expireson December 31, 2008 and may be terminated by either party without causeand without penalty upon 120 days prior written notice. The agreement can alsobe terminated by either party upon less than 120 days prior written notice;however penalties will apply. The agreement prohibits us from representingproducts that compete with certain of Merial’s products, particularly thosewhich are used for the treatment and/or control and/or prevention of fleas,ticks or heartworms.

***Item7A.***        Quantitative andQualitative Disclosures About Market Risk.

We are exposed to marketrisks primarily from changes in interest rates in the United States. We havemanaged this risk by, pursuant to the terms of the amended credit agreement,converting the interest rate payable on the majority of the outstanding loanbalance on the revolving credit facility into a lower LIBOR interest rate. Wedo not engage in financial transactions for trading or speculative purposes.

The interest payable onthe revolving credit facility under the amended credit agreement is based onvariable interest rates and is affected by changes in market interest rates. Ifthe interest rate on the variable rate indebtedness rose 83 basis points (a10.0% change from the interest rate as of September 30, 2006), assuming nochange in the outstanding balance on the revolving credit facility under theamended credit agreement (approximately $10,559), the annualized income beforetaxes and cash flows from operating activities would decline by approximately$88. If the interest rate on the variable rate indebtedness decreased 83 basispoints (a 10.0% change from the interest rate as of September 30, 2006),assuming no change in the outstanding balance on the revolving credit facilityunder the amended credit agreement, the annualized income before taxes and cashflows from operating activities would increase by approximately $88.

42

----

***Item 8.****                          FinancialStatements and Supplementary Data.*

**MWIVeterinary Supply, Inc.Index to Consolidated Financial Statements**
|                                                                                                                  | ** ** | **Page  Number** |   |
|------------------------------------------------------------------------------------------------------------------|------------|------------------|--------|
| Report of Independent Registered Public Accounting  Firm                                                         |       |             | 44     |   |
| Consolidated Statements of Income for the years ended  September 30, 2006, 2005 and 2004                    |       |             | 45     |   |
| Consolidated Statements of Comprehensive Income for  the years ended September 30, 2006, 2005 and 2004 |       |             | 46     |   |
| Consolidated Balance Sheets as of September 30,  2006 and 2005                                              |       |             | 47     |   |
| Consolidated Statements of Stockholders’ Equity for  the years ended September 30, 2006, 2005 and 2004 |       |             | 48     |   |
| Consolidated Statements of Cash Flows for the years  ended September 30, 2006, 2005 and 2004                |       |             | 49     |   |
| Notes to Consolidated Financial Statements                                                                       |       |             | 50     |   |
|                                                                                                                  |            |                  |        |  |  |

 

43

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofMWI Veterinary Supply, Inc.Meridian, Idaho

We have audited the accompanying consolidated balancesheets of MWI Veterinary Supply, Inc. and subsidiaries (the “Company”) asof September 30, 2006 and 2005, and the related consolidated statements ofincome, comprehensive income, stockholders’ equity, and cash flows for each ofthe three years in the period ended September 30, 2006. Our audits alsoincluded the consolidated financial statement schedule listed in the Index atItem 15. These consolidated financial statements and consolidated financialstatement schedule are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements and consolidated financial statement schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, such consolidated financial statementspresent fairly, in all material respects, the financial position of MWIVeterinary Supply, Inc. and subsidiaries as of September 30, 2006 and2005, and the results of their operations and their cash flows for each of thethree years in the period ended September 30, 2006, in conformity withaccounting principles generally accepted in the United States of America. Also,in our opinion, such consolidated financial statement schedule, when consideredin relation to the consolidated financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of September 30, 2006, basedon the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated November 21, 2006 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.
| /s/ DELOITTE &  TOUCHE LLP |   |
|-------------------------------------|--------|
| Boise, Idaho                        |   |
| November 21, 2006              |   |
|                                     |        |  |

 

44

----

**MWI VETERINARYSUPPLY, INC.CONSOLIDATED STATEMENTS OF INCOMEFor the Years Ended September 30, 2006, 2005 and 2004Dollars and shares in thousands, except per share amounts**

| ** **                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenues:                                     |       |     |       |     |       |     |       |
| Product sales                                 |       | $        | 564,289    |     | $          | 463,272  |       | $ | 367,863 |   |
| Product sales to related party                |       | 34,123   |       | 28,473   |       | 22,163   |       |
| Commissions                                   |       | 7,782    |       | 4,910    |       | 4,256    |       |
| Total revenues                                |       | 606,194  |       | 496,655  |       | 394,282  |       |
| Cost of product  sales                        |       | 518,068  |       | 426,709  |       | 338,684  |       |
| Gross profit                                  |       | 88,126   |       | 69,946   |       | 55,598   |       |
| Selling, general  and administrative expenses |       | 62,470   |       | 52,647   |       | 41,872   |       |
| Depreciation and  amortization                |       | 1,964    |       | 1,528    |       | 1,146    |       |
| Operating income                              |       | 23,692   |       | 15,771   |       | 12,580   |       |
| Other income (expense):                       |       |     |       |     |       |     |       |
| Interest expense                              |       | (1,959   | )          | (6,515   | )          | (6,098   | )          |
| Earnings of equity method investees           |       | 161      |       | 131      |       | 104      |       |
| Other                                         |       | 338      |       | 268      |       | 218      |       |
| Total other expense, net                      |       | (1,460   | )          | (6,116   | )          | (5,776   | )          |
| Income before  taxes                          |       | 22,232   |       | 9,655    |       | 6,804    |       |
| Income tax  expense                           |       | (8,396   | )          | (5,098   | )          | (4,280   | )          |
| Net income                                    |       | $        | 13,836     |     | $          | 4,557    |       | $ | 2,524 |   |
| Earnings per common  share:                   |       |     |       |     |       |     |       |
| Basic                                         |       | $        | 1.28       |     | $          | 0.76     |       | $ | 0.50 |   |
| Diluted                                       |       | $        | 1.25       |     | $          | 0.68     |       | $ | 0.43 |   |
| Weighted average common  shares outstanding:  |       |     |       |     |       |     |       |
| Basic                                         |       | 10,773   |       | 5,970    |       | 5,038    |       |
| Diluted                                       |       | 11,072   |       | 6,697    |       | 5,878    |       |

 

See notes to consolidated financial statements

45

----

**MWI VETERINARYSUPPLY, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFor the Years Ended September 30, 2006, 2005 and 2004Dollars in thousands**

| ** **                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net income                                                         |       | $        | 13,836     |     | $          | 4,557    |       | $ | 2,524 |   |
| Other comprehensive  income (loss):                                |       |     |       |     |       |     |       |
| Interest rate  swap:                                               |       |     |       |     |       |     |       |
| Change in fair value, net of tax of $0, $0 and $9                  |       | —   |       | —   |       | (14      | )          |
| Amount reclassified into net income, net of tax of  $0, $9, and $6 |       | —   |       | 14       |       | 9        |       |
| Total  comprehensive income                                        |       | $        | 13,836     |     | $          | 4,571    |       | $ | 2,519 |   |

 

See notes to consolidated financial statements.

46

----

**MWI VETERINARY SUPPLY, INC.CONSOLIDATED BALANCE SHEETSAs of September 30, 2006 and 2005Dollars and shares in thousands, except per share amounts**

| ** **                                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                      |       |     |       |     |       |
| Current Assets:                                                                                                 |       |     |       |     |       |
| Cash                                                                                                            |       | $        | 37         |     | $          | 31 |   |
| Receivables, net                                                                                                |       | 99,518   |       | 77,099   |       |
| Inventories                                                                                                     |       | 85,083   |       | 68,786   |       |
| Prepaid expenses and other current assets                                                                       |       | 2,651    |       | 2,011    |       |
| Deferred income taxes                                                                                           |       | 502      |       | 482      |       |
| Total current assets                                                                                            |       | 187,791  |       | 148,409  |       |
| Property and  equipment, net                                                                                    |       | 7,053    |       | 6,919    |       |
| Goodwill                                                                                                        |       | 31,562   |       | 29,739   |       |
| Intangibles, net                                                                                                |       | 2,381    |       | 1,644    |       |
| Other assets, net                                                                                               |       | 1,772    |       | 1,533    |       |
| Total assets                                                                                                    |       | $        | 230,559    |     | $          | 188,244 |   |
| **Liabilities And Stockholders’ Equity**                                                                   |       |     |       |     |       |
| Current Liabilities:                                                                                            |       |     |       |     |       |
| Line-of-credit                                                                                                  |       | $        | 10,559     |     | $          | 24,690 |   |
| Accounts payable                                                                                                |       | 82,561   |       | 69,382   |       |
| Accrued expenses                                                                                                |       | 6,919    |       | 6,341    |       |
| Current maturities of long-term debt                                                                            |       | 97       |       | 97       |       |
| Total current liabilities                                                                                       |       | 100,136  |       | 100,510  |       |
| Deferred income  taxes                                                                                          |       | 505      |       | 650      |       |
| Long-term debt                                                                                                  |       | 292      |       | 390      |       |
| Commitments and  contingencies                                                                                  |       |     |       |     |       |
| **Stockholders’ Equity**                                                                                   |       |     |       |     |       |
| Common stock $0.01 par value, 20,000 authorized;  11,549 and 10,576 shares issued and outstanding, respectively |       | 115      |       | 106      |       |
| Additional paid in capital                                                                                      |       | 107,483  |       | 78,396   |       |
| Retained earnings                                                                                               |       | 22,028   |       | 8,192    |       |
| Total stockholders’ equity                                                                                 |       | 129,626  |       | 86,694   |       |
| Total liabilities and  stockholders’ equity                                                                |       | $        | 230,559    |     | $          | 188,244 |   |

 

See notes to consolidated financial statements

47

----

**MWI VETERINARYSUPPLY, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYFor the Years Ended September 30, 2006, 2005 and 2004Dollars and shares in thousands**

| ** **                                                                     | ** ** | ** **         | ** ** | ** ** | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** **  | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------|------------|------------|------------|------------------|------------|-------------------|------------|--------------|------------|-------------|------------|
| ** **                                                                     | ** ** | **Shares of** | ** ** | ** ** | ** ** | **Additional**   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** **  | ** ** |
| ** **                                                                     | ** ** | **Common**         | ** ** | **Common** | ** ** | **Paid In** | ** ** | **Comprehensive** | ** ** | **Retained** | ** ** | ** **  | ** ** |
| ** **                                                                     | ** ** | **Stock**          | ** ** | **Stock**  | ** ** | **Capital**      | ** ** | **Income/(Loss)** | ** ** | **Earnings** | ** ** | **Total**   | ** ** |
| **Balance  at September 30, 2003**                                        | ** ** |               | **5,560**  | ** ** |       |             | **$**      | **56**            | ** ** |         | **$**      | **955**     | ** ** |   | **$** | **(9** | **)** |   | **$** | **1,111** | ** ** | **$** | **2,113** | ** ** |
| Net income                                                                     |       |               | —     | ** ** |       |             | —     | ** **        |       | —       |       |        | —     |   |   | 2,524 |   | 2,524 |   |
| Other  comprehensive loss                                                      |       |               | —     | ** ** |       |             | —     | ** **        |       | —       |       |        | (5         | ) |   | — |   | (5 | ) |
| **Balance  at September 30, 2004**                                        | ** ** |               | **5,560**  | ** ** |       |             | **56**     | ** **        |       | **955**      | ** ** |        | **(14**    | **)** |   | **3,635** | ** ** | **4,632** | ** ** |
| Net income                                                                     |       |               | —     | ** ** |       |             | —     | ** **        |       | —       |       |        | —     |   |   | 4,557 |   | 4,557 |   |
| Issuance of  common stock, net of issuance costs of $7,558                     |       |               | 4,983      | ** ** |       |             | 50         | ** **        |       | 77,109       |       |        | —     |   |   | — |   | 77,159 |   |
| Exercises of  common stock options                                             |       |               | 33         | ** ** |       |             | —     | ** **        |       | 30           |       |        | —     |   |   | — |   | 30 |   |
| Tax benefit of  common stock exercises                                         |       |               | —     | ** ** |       |             | —     | ** **        |       | 302          |       |        | —     |   |   | — |   | 302 |   |
| Other  comprehensive income                                                    |       |               | —     | ** ** |       |             | —     | ** **        |       | —       |       |        | 14         |   |   | — |   | 14 |   |
| **Balance  at September 30, 2005**                                        | ** ** |               | **10,576** | ** ** |       |             | **106**    | ** **        |       | **78,396**   |       |        | —     | ** ** |   | **8,192** | ** ** | **86,694** | ** ** |
| Net income                                                                     |       |               | —     | ** ** |       |             | —     | ** **        |       | —       |       |        | —     |   |   | 13,836 |   | 13,836 |   |
| Issuance of  common stock, net of issuance costs of $1,969                     |       |               | 909        | ** ** |       |             | 9          | ** **        |       | 27,332       |       |        | —     |   |   | — |   | 27,341 |   |
| Issuance of  restricted stock for purchase of Northland Veterinary Supply |       |               | 29         | ** ** |       |             | —     | ** **        |       | 995          |       |        | —     |   |   | — |   | 995 |   |
| Exercises of common  stock options                                             |       |               | 31         | ** ** |       |             | —     | ** **        |       | 597          |       |        | —     |   |   | — |   | 597 |   |
| Tax benefit of  common stock exercises                                         |       |               | —     | ** ** |       |             | —     | ** **        |       | 148          |       |        | —     |   |   | — |   | 148 |   |
| Other                                                                          |       |               | 4          | ** ** |       |             | —     | ** **        |       | 15           |       |        | —     |   |   | — |   | 15 |   |
| **Balance at September 30,  2006**                                        | ** ** |               | **11,549** | ** ** |       |             | **$**      | **115**           | ** ** |         | **$**      | **107,483** |       |   | $ | — | ** ** |   | **$** | **22,028** | ** ** | **$** | **129,626** | ** ** |

 

See notes to consolidated financial statements

48

----

**MWI VETERINARYSUPPLY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended September 30, 2006, 2005 and 2004Dollars in thousands**

| ** **                                                                              | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash Flows From Operating Activities:**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                              |       | $          | 13,836     |       | $          | 4,557      |       | $ | 2,524 |   |
| Adjustments to reconcile net income to net cash used  in operating activities:          |       |       |       |       |       |       |       |
| Accretion of redeemable  preferred stock                                                |       | —     |       | 4,055      |       | 4,239      |       |
| Depreciation and  amortization                                                          |       | 1,973      |       | 1,536      |       | 1,146      |       |
| Amortization of debt  issuance costs                                                    |       | 140        |       | 140        |       | 140        |       |
| Deferred income taxes                                                                   |       | (165       | )          | (205       | )          | 335        |       |
| Earnings of equity  method investees                                                    |       | (161       | )          | (131       | )          | (105       | )          |
| Distribution from equity  method investee                                               |       | —     |       | 43         |       | —     |       |
| Tax benefit of common  stock options                                                    |       | (148       | )          | —     |       | —     |       |
| Gain on disposal of  property and equipment                                             |       | (51        | )          | (6         | )          | (8         | )          |
| Other                                                                                   |       | 5          |       | —     |       | —     |       |
| Changes in operating assets and liabilities (net of  effects of business acquisitions): |       |       |       |       |       |       |       |
| Receivables                                                                             |       | (21,022    | )          | (15,276    | )          | (10,071    | )          |
| Inventories                                                                             |       | (15,114    | )          | (17,334    | )          | (12,668    | )          |
| Prepaid expenses and  other current assets                                              |       | (639       | )          | (714       | )          | (359       | )          |
| Accounts payable                                                                        |       | 12,839     |       | 15,837     |       | 653        |       |
| Accrued expenses                                                                        |       | 756        |       | 1,887      |       | 285        |       |
| Net cash used in  operating activities                                                  |       | (7,751     | )          | (5,611     | )          | (13,889    | )          |
| **Cash Flows From Investing Activities:**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Business acquisitions                                                                   |       | (3,551     | )          | (5,033     | )          | —     |       |
| Purchases of property  and equipment                                                    |       | (3,663     | )          | (2,022     | )          | (1,254     | )          |
| Sale of property and  equipment                                                         |       | 1,455      |       | 564        |       | 13         |       |
| Other                                                                                   |       | (306       | )          | (38        | )          | (10        | )          |
| Net cash used in  investing activities                                                  |       | (6,065     | )          | (6,529     | )          | (1,251     | )          |
| **Cash Flows From Financing Activities:**                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Issuance of common  stock, net of issuance costs                                        |       | 27,341     |       | 77,159     |       | —     |       |
| Tax benefit of common  stock options                                                    |       | 148        |       | 302        |       | —     |       |
| Proceeds from stock  options                                                            |       | 597        |       | 30         |       | —     |       |
| Proceeds from issuance  of debt                                                         |       | —     |       | 836        |       | 208        |       |
| Redemption of preferred  stock and accrued dividends                                    |       | —     |       | (39,789    | )          | —     |       |
| Net (payments)  borrowings on line-of-credit                                            |       | (14,131    | )          | (24,439    | )          | 15,157     |       |
| Payment on debt                                                                         |       | (133       | )          | (1,856     | )          | (133       | )          |
| Debt issuance costs                                                                     |       | —     |       | (100       | )          | (100       | )          |
| Net cash provided by  financing activities                                              |       | 13,822     |       | 12,143     |       | 15,132     |       |
| **Increase  (Decrease) in Cash**                                                        |       | 6          |       | 3          |       | (8         | )          |
| Cash at Beginning of  Year                                                              |       | 31         |       | 28         |       | 36         |       |
| Cash at End of Year                                                                     |       | $          | 37         |       | $          | 31         |       | $ | 28 |   |

 

See notes to consolidated financial statements

49

----

**MWI VETERINARY SUPPLY, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDollars in thousands, except share and per share data**

**1.**                 Business Description and Basis ofPresentation

MWI Veterinary Supply, Inc. is a leadingdistributor of animal health products to veterinarians across the UnitedStates. We market our products to veterinarians in both the companion andproduction animal markets. We operate twelve distribution centerslocated in the Western United States, Texas, Michigan, Georgia, Pennsylvania,Wisconsin, and Florida. We also provide supplies to Feeders’ Advantage, L.L.C.(“Feeders Advantage”), a 50% owned entity that sells to various feedlotcompanies.

MWI VeterinarySupply, Inc. (formerly named MWI Holdings, Inc.) was formed on June 18,2002 for the sole purpose of acquiring all of the outstanding stock of MWIVeterinary Supply Co. (“MWI Co.”) from its then owner, Agri Beef Co. (“AgriBeef”).

The acquisition of MWI Co. by MWI Veterinary Supply, Inc. wasaccounted for in accordance with the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 141, *BusinessCombinations*. Accordingly, MWI Co.’s assets and liabilities wereadjusted to fair value based on the purchase price paid by MWI VeterinarySupply, Inc. The principal effects of these adjustments were an increaseto property and equipment of $590, an increase to investments of $232 and therecording of goodwill of $28,615. During 2003, we resolved a preacquisitioncontingency related to tax liabilities resulting in a reduction of goodwill of$328.

**2.**                 Summary of Significant AccountingPolicies

*Principles of Consolidation—**The*accompanyingconsolidated financial statements consist of MWI Veterinary Supply, Inc.and its wholly-owned subsidiaries, collectively referred to herein as “MWI”. Allintercompany transactions have been eliminated. We use the equity method ofaccounting for our investments in entities in which we have significantinfluence; generally this represents an ownership interest between 20% and 50%.Our share of income or loss from these investments is reported as increases ordecreases in the respective investment with a corresponding amount reported asother income.

*Basis of Accounting and Use of Estimates—**The*accompanyingconsolidated financial statements have been prepared on the accrual basis ofaccounting using accounting principles generally accepted in the United States.In preparing financial information, we use certain estimates and assumptionsthat may affect the reported amounts and disclosures. Some of these estimatesrequire difficult, subjective, and complex judgments about matters that areinherently uncertain. As a result, actual results could differ from theseestimates. Estimates are used when accounting for sales returns, allowance fordoubtful accounts, customer incentives, vendor rebates, inventories, goodwilland intangible assets, income taxes, impairment of long-lived assets,depreciation and amortization, employee benefits, unearned income andcontingencies. The estimates of fair value of assets and liabilities and thedisclosure of contingent assets and liabilities as of the balance sheet dateand reported amounts of revenue and expenses for the periods are based onassumptions that we believe to be reasonable.

*Segment Information—**We***are a distributor of animal healthproducts to veterinarians. These operations are within a single reportingsegment and are located within the United States.

*Revenue Recognition—**We*sell products wesource from vendors to our customers through either a “buy/sell” transaction oran agency relationship with our vendors. In a “buy/sell” transaction, wepurchase or take inventory of products from the vendor. When a customer placesan order with us, we pick, pack, 

50

----

ship and invoice thecustomer for the order. We recognize revenue from “buy/sell” transactions asproduct sales when the product is delivered to the customer. We accept productreturns from our customers. We estimate returns based on historical experienceand recognize these estimated returns as a reduction of product sales. Productreturns have not been significant to our financial statements. In an agencyrelationship, we generally do not purchase and take inventory of products fromvendors. We receive an order from a customer, then transmit the order to thevendor, who picks, packs and ships the order to the customer. In some cases,the vendor invoices and collects payment from the customer, while in othercases we invoice and collect payment from the customer on behalf of the vendor.We receive a commission payment for soliciting the order from the customer andfor providing other customer service activities. Commissions are recognizedwhen the services upon which the commissions are based are complete. Grossbillings from agency contracts were $151,376, $102,883 and $86,657 for theyears ended September 30, 2006, 2005 and 2004, respectively, and generatedcommission revenue of $7,782, $4,910 and $4,256, respectively.

*Cost of Product Sales and Vendor Rebates—**Cost***of product sales consist of ourinventory product cost, including shipping costs to and from our distributioncenters. Vendor rebates are recorded based on the terms of the contracts orprograms with each vendor. We primarily receive quarterly, trimester,semi-annual and annual performance-based rebates from third-party vendors basedupon attainment of certain sales and/or purchase goals. Sales rebates areclassified in the accompanying consolidated statements of income as a reductionto cost of product sales at the time the sales performance measures are achieved.Purchase rebates are measured against inventory purchases from the vendors andare classified as a reduction of inventory until the product is sold. When theinventory is sold and purchase measures are achieved, purchase rebates arerecognized as a reduction to cost of product sales.

*Customer Incentives—**Customer***incentives are accrued based on theterms of the contracts with each customer*.*These incentive programs provide that the customer receive an incentive basedon their product purchases or attainment of performance goals. Incentives areestimated based on the specific terms in each agreement, historical experienceand product growth rates.

*Cash—**For*thepurposes of the statements of cash flows, cash consists of cash on hand. Ourbanking arrangements allow us to fund outstanding checks when presented to thefinancial institution for payment. This cash management practice frequentlyresults in a net cash book overdraft position, which occurs when total issuedchecks exceed available cash balances at a single financial institution. Wehave recorded our cash disbursement accounts with a net cash book overdraftposition in accounts payable. At September 30, 2006 and 2005, we had netcash book overdrafts of $4,224 and $9,581, respectively, classified in accountspayable.

*Inventories—**Inventories,***consisting of pharmaceuticals,vaccines, parasiticides, diagnostics, capital equipment, supplies andnutritional products, arestated at the lower of cost (on a moving-average basis) or market.

*Property and Equipment—**Property***and equipment are stated at costand depreciation is computed using the straight-line method over the estimateduseful lives of the related assets as follows:

| Buildings                          |   | 25 years                             |   |
|------------------------------------|--------|--------------------------------------|--------|
| Machinery, furniture and equipment |   | 3 to 7 years                         |   |
| Computer equipment                 |   | 3 to 5 years                         |   |
| Leasehold improvements             |   | Shorter of useful life or lease term |   |

 

The cost andaccumulated depreciation of items sold or retired are removed from the propertyaccounts and any resulting gain or loss is reflected in net income. Repairs andmaintenance are expensed as incurred and renewals and improvements arecapitalized.

51

----

We periodicallyreview long-lived assets for impairment when events or changes in circumstancesindicate that the carrying amount of an asset may not be recoverable. If thesum of the undiscounted expected future cash flows from an asset is less thanthe carrying value of the asset, an asset impairment must be recognized in thefinancial statements by writing down the asset to its fair value.

*Goodwill—**We*recognize the excess purchase priceover the fair value of net assets acquired and liabilities assumed in abusiness combination as goodwill on the consolidated balance sheet. Goodwill isnot amortized, but instead tested for impairment at least annually. We performan annual impairment test as of September 30 each year and we haveconcluded that goodwill was not impaired at September 30, 2006 or 2005.Goodwill impairment tests will continue to be performed at least annually, andmore frequently if circumstances indicate a possible impairment. The followingtable summarizes the goodwill recognized in connection with each businesscombination.

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| MWI Veterinary  Supply Co.        |       | $        | 28,287     |     | $          | 28,287 |   |
| Northland  Veterinary Supply, Ltd |       | 1,823    |       | —   |       |
| Vetpo  Distributors, Inc.    |       | 1,386    |       | 1,386    |       |
| Memorial Pet  Care, Inc.     |       | 66       |       | 66       |       |
|                              |       | $        | 31,562     |     | $          | 29,739 |   |

* *

*Other Assets—**Included***in other assets are investmentsthat consist of our equity method investment in one entity and two entitiesaccounted for under the cost method of accounting. Other assets also consist ofdebt issuance costs that are being amortized over the life of the related debt.

*Earnings Per Common Share—**Basic*earningsper common share is calculated based on the weighted-average number ofoutstanding common shares during the applicable period. Diluted earnings percommon share is based on the weighted-average number of outstanding commonshares plus the weighted-average number of potential outstanding common shares.Potential common shares that would increase earnings per share amounts ordecrease loss per share amounts are antidilutive and are, therefore, excludedfrom the earnings per common share computations. Earnings per common share iscomputed separately for each period presented.

*Income Taxes—**Income*taxes areaccounted for under the asset and liability method. Deferred income taxes arerecognized to provide for temporary differences between the financial reportingand tax basis of assets and liabilities. Deferred taxes are measured usingenacted tax rates in effect during the years in which the temporary differencesare expected to reverse.

*Concentrations of Risk—**Our*financialinstruments that are exposed to concentrations of credit risk consist primarilyof our receivables. Our customers are geographically dispersed throughout theUnited States. We routinely assess the financial strength of our customers andreview their credit history before extending credit. In addition, we establishan allowance for doubtful accounts based upon factors surrounding the creditrisk of specific customers, historical trends and other information.

Product sales toone customer were approximately 10% of our total product sales in 2006, 2005and 2004. Product sales to another customer, a related party (See Note 14),were approximately 5% of our total product sales in the fiscal year 2006 and 6%of our total product sales in the fiscal years 2005 and 2004.

*Comprehensive Income—**Components*of ourcomprehensive income include net income and changes in fair value of interestrate swaps.

*Advertising—**Advertising*costs areexpensed when incurred and are included as part of selling, general andadministrative expenses. Advertising costs were $257, $142 and $413 in 2006,2005 and 2004, respectively.

52

----

*Derivative Financial Instruments—**We*record all derivatives at fairvalue and designate derivative instruments as being used to hedge changes infair value or changes in cash flows. Changes in the fair value of derivativesthat offset changes in cash flows of a hedged item are recorded initially inother comprehensive income. Amounts recorded in other comprehensive income aresubsequently reclassified into earnings during the same period in which thehedged item affects earnings. Any portion of the changes in fair value ofderivatives designated as a hedge that is deemed ineffective is recorded inearnings. To manage our interest rate exposure, we entered into interest rateswap agreements in the fiscal years 2004 and 2003, which expired in the fiscalyears 2005 and 2004, respectively (See Note 7). We had no interest rateswaps at September 30, 2006 or 2005.

*Stock-Based Compensation—**Effective*October 1,2005, we adopted the provisions of SFAS No. 123- (Revised), *Share-Based Payment* (“SFAS 123-R”) for our share-basedcompensation plans using the modified prospective method. We previouslyaccounted for these plans under the recognition and measurement principals ofAccounting Principles Board Opinion (“APB”) No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”) and relatedinterpretations and disclosure requirements established by SFAS No. 123, *Accounting for Stock-based Compensation* (“SFAS 123”), asamended by SFAS No. 148, *Accounting for Stock BasedCompensation—Transition and Disclosure*(“SFAS 148”). Under APB No. 25,no compensation expense was recorded in earnings for our stock-based awardsgranted under our stock-based award plans. The pro forma effects on net incomeand earnings per share for stock-based awards were instead disclosed in afootnote to the financial statements. Under SFAS 123-R, all share-basedcompensation is measured at the grant date, based on the fair value of theaward, and is recognized as an expense in earnings over the requisite serviceperiod. Under SFAS 123-R, the fair value of stock-based awards toemployees is calculated through the use of option pricing models, even thoughsuch models were developed to estimate the fair value of freely tradable, fullytransferable options without vesting restrictions, which significantly differfrom the characteristics of our stock option awards. These models also requiresubjective assumptions, including expected time to exercise, which greatlyaffect the calculation.

53

----

We adopted SFAS 123-R using themodified prospective method. Under this transition method, compensation expenseincludes the expense for all share-based awards granted prior to, but not yetvested as of October 1, 2005 excluding those options initially valuedusing the minimum value method. At October 1, 2005, all of our options topurchase common stock were either vested and exercisable or were initiallyvalued using the minimum value method. Therefore, we have recognized nocompensation expense for stock-based option awards in the fiscal year ended September 30,2006. The following table summarizes the effect on fiscal years 2005 and 2004net income and earnings per common share had we recognized compensation expensefor options using the fair value method:

| ** **                                                                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net income                                                                                                                                   |       | $        | 4,557      |     | $          | 2,524 |   |
| Deduct:  Stock-based employee compensation expense determined under fair-value-based  method for all awards, net of related tax effects |       | (602     | )          | (1       | )          |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effects                                 |       | —   |       | —   |       |
| Pro Forma net  income                                                                                                                        |       | $        | 3,955      |     | $          | 2,523 |   |
| Basic Earnings  Per Common Share:                                                                                                            |       |     |       |     |       |
| As Reported                                                                                                                                  |       | $        | 0.76       |     | $          | 0.50 |   |
| Pro Forma                                                                                                                                    |       | $        | 0.66       |     | $          | 0.50 |   |
| Diluted Earnings  Per Common Share:                                                                                                          |       |     |       |     |       |
| As Reported                                                                                                                                  |       | $        | 0.68       |     | $          | 0.43 |   |
| Pro Forma                                                                                                                                    |       | $        | 0.59       |     | $          | 0.43 |   |

 

Calculations of the pro forma fair valueof stock-based awards granted under the 2002 Stock Option Plan (See Note 9 “CommonStock and Stock Options”) were based on a single option valuation approach as anon-public company. Forfeitures are recognized as they occur. Our calculationswere made using the minimum value method with the following weighted averageassumptions at September 30, 2003 (there were no grants under this programin 2004, 2005, or 2006):

| Risk-free  interest rate |   | 2.97 | %      |
|--------------------------|--------|------|--------|
| Expected life in  years  |   | 5    |   |
| Expected  volatility     |   | None |   |
| Dividends                |   | None |   |

 

In our fourth quarter of 2005 we granted135,103 nonqualified options (that were fully vested by September 30,2005) to purchase our common stock. We utilized the Black-Scholes-Merton OptionPricing Model to value these post initial public offering grants for pro formapresentation of net income and earnings per share as if the fair value-basedaccounting method in SFAS 123 had been used. Our computations used thefollowing assumptions to derive the options fair value and related compensationexpense:

| Risk-free  interest rate |   | 4.1% to 4.2 | %      |
|--------------------------|--------|-------------|--------|
| Expected life in  years  |   | 5           |   |
| Expected  volatility     |   | 36.7        | %      |
| Dividends                |   | None        |   |

 

We granted no common stock options during our fiscalyear ended September 30, 2006.

54

----

*Recently Issued and New AccountingPronouncements—**In***November 2004, the FASB issuedSFAS 151, *Inventory Costs, an Amendmentof ARB No. 43,Chapter 4* (“SFAS 151”). SFAS 151 clarifiesthat inventory costs that are “abnormal” are required to be charged to expenseas incurred as opposed to being capitalized into inventory as a product cost.SFAS 151 provides examples of “abnormal” costs which include costs of idlefacilities, excess freight and handling costs and wasted material (spoilage).SFAS 151 was effective for our fiscal year beginning October 1, 2005 anddid not have a material effect on our consolidated financial statements.

In December 2004,the FASB issued SFAS 123 (Revised), *Share-BasedPayment* (“SFAS 123-R”). SFAS 123-R replaces SFAS123, *Accounting for Stock-based Compensation*(“SFAS 123”), as amended by SFAS No. 148, *Accountingfor Stock Based Compensation—Transition and Disclosure* andsupersedes Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*. Adoption of SFAS123-R requires us to record a non-cash expense for our stock compensationplans using the fair value method. SFAS 123-R was effective for us on October 1,2005 and the adoption did not have a material effect on our consolidatedfinancial statements.

In December 2004,the FASB issued SFAS 153, *Exchanges ofNonmonetary Assets—An Amendment of APB Opinion No. 29*(“SFAS 153”),which eliminates the exception for nonmonetary exchanges of similar productiveassets and replaces it with a general exception for exchanges of nonmonetaryassets that do not have commercial substance. We adopted SFAS 153 as of October 1,2005 and the adoption did not have a material effect on our consolidatedfinancial statements.

In May 2005, the FASB issued SFAS 154, *Accounting Changes and Error Corrections*(“SFAS 154”)*.*SFAS 154 replaces FASB Statement No. 3,*Reporting Accounting Changes in InterimFinancial Statements*, and replaces ABP Opinion No. 20, *Accounting Changes.*SFAS 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005 and will be effective for us for the fiscal yearbeginning October 1, 2006. The adoption of SFAS 154 is not expectedto have a material effect on our consolidated financial statements.

In September 2005, the Emerging Issues Task Forceissued EITF No. 04-13, *Accountingfor Purchases and Sales of Inventory with the Same Counterparty*(“EITF 04-13”). EITF 04-13requires that purchases and sales of inventory with the same counterparty beaccounted for as a nonmonetary transaction within the scope of APB Opinion No. 29,*Accounting for Nonmonetary Transactions.*EITF04-13 is effective for new arrangements entered into, or modifications orrenewals of existing arrangements, beginning in the first interim or annualreporting period beginning after March 15, 2006. We adopted EITF 04-13as of April 1, 2006 and the adoption did not have a material effect on ourconsolidated financial statements.

In July 2006, the FASB issued Interpretation No. 48(“FIN 48”), *Accounting for Uncertainty in Income Taxes*,which clarifies the accounting for uncertainty in income taxes recognized inthe financial statements in accordance with FASB Statement No. 109, *Accounting for Income Taxes*. FIN 48 provides guidance on thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosures, and transition. FIN 48 is effective for our fiscal yearbeginning October 1, 2007. We are currently evaluating the impact of thisstatement on our consolidated financial statements.

In September 2006, the FASB issued SFAS 157, *Fair Value Measurements* (“SFAS 157”). SFAS 157 defines fairvalue, establishes a framework for measuring fair value according to generallyaccepted accounting principles, and expands disclosure requirements regardingfair value measurements. This statement emphasizes that fair value should bedetermined based on assumptions market participants would use to price theasset or liability. SFAS 157 is effective for our fiscal year and interimperiod beginning October 1, 2008. We are currently evaluating the impact,if any, that SFAS 157 will have on our consolidated financial statements.

55

----

In September 2006,the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108(“SAB 108”) which provides guidance on quantifying and evaluating themateriality of unrecorded misstatements. SAB 108 is effective for our fiscalyear beginning October 1, 2007. We are currently evaluating the impact, ifany, that this guidance will have on our consolidated financial statements.

**3.**                 Business Acquisitions

On November 1,2004, we purchased certain assets of Memorial Pet Care, Inc. (“MemorialPet Care”), a pet crematorium, for $400 cash (plus approximately $32 of directacquisition costs).

On January 3, 2005, we purchased substantiallyall of the assets of Vetpo Distributors, Inc. (“Vetpo”), a regional animalhealth products distributor located in Holland, Michigan, for $4,500 in cash(plus approximately $101 of direct acquisition costs) and the issuance of anote payable for $487.

On May 8, 2006, we acquired substantially all ofthe assets of Northland Veterinary Supply, Ltd. (“Northland”) for approximately$4,546 consisting of $3,551 in cash (including direct acquisition costs ofapproximately $116) and 28,744 shares of unregistered restricted common stock valuedat the time of issuance at approximately $995. Based in Clear Lake, Wisconsin,Northland is a distributor of animal health products to veterinary practicesand producers across the Midwestern portion of the United States.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of each acquisition, as adjusted during theallocation period as defined in SFAS No. 141, *BusinessCombinations*. These purchase price allocations are based on acombination of valuations and internal analyses.

| ** **                 | ** ** | **Northland Veterinary** | ** ** | **Vetpo**                   | ** ** | **Memorial Pet** | ** ** |
|----------------------------|------------|-------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **Supply, Ltd.**         | ** ** | **Distributors, Inc.** | ** ** | **Care, Inc.**   | ** ** |
| Receivables                |       |                          | $          | 1,298                       |       |                  |       | $ | 2,068 |   |   |   | $ | 24 |   |   |
| Inventories                |       |                          | 1,182      |                        |       |                  | 1,927      |   |   |   | — |   |   |
| Property and  equipment    |       |                          | 137        |                        |       |                  | 91         |   |   |   | 107 |   |   |
| Goodwill                   |       |                          | 1,823      |                        |       |                  | 1,386      |   |   |   | 66 |   |   |
| Intangibles                |       |                          | 965        |                        |       |                  | 1,543      |   |   |   | 246 |   |   |
| Other assets               |       |                          | 25         |                        |       |                  | —     |   |   |   | — |   |   |
| Total assets  acquired     |       |                          | 5,430      |                        |       |                  | 7,015      |   |   |   | 443 |   |   |
| Accounts payable           |       |                          | 849        |                        |       |                  | 1,927      |   |   |   | 11 |   |   |
| Note payable               |       |                          | 35         |                        |       |                  | 487        |   |   |   | — |   |   |
| Total liabilities  assumed |       |                          | 884        |                        |       |                  | 2,414      |   |   |   | 11 |   |   |
| Net assets  acquired       |       |                          | $          | 4,546                       |       |                  |       | $ | 4,601 |   |   |   | $ | 432 |   |   |

 

For the Northlandacquisition, acquired intangible assets include $821 assigned to customerrelationships and $144 assigned to covenants not to compete which are amortizedon a straight-line basis over their expected useful lives of 9 years and 5years, respectively. For the Vetpo and Memorial Pet Care acquisitions,intangible assets include in the aggregate $1,589 for customer relationships,$148 assigned to covenants not to compete and other, which are amortized on astraight-line basis over the estimated useful lives of 10 years and 5 years,respectively. The $3,275 recorded in goodwill for all three acquisitions isexpected to be deductible for tax purposes over 15 years.

56

----

**4.**                 Receivables

Receivables consist of the following at September 30:

| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Trade                             |       | $        | 89,541     |     | $          | 69,969 |   |
| Vendor rebates  and programs      |       | 10,731   |       | 6,882    |       |
| Related  party—(See Note 14) |       | 400      |       | 1,429    |       |
|                              |       | 100,672  |       | 78,280   |       |
| Allowance for  doubtful accounts  |       | (1,154   | )          | (1,181   | )          |
|                              |       | $        | 99,518     |     | $          | 77,099 |   |

 

Approximately 10% and 7% of our trade receivables resulted fromtransactions with a single customer as of September 30, 2006 and 2005,respectively.

**5.**                 Property and Equipment

Property and equipment consists of thefollowing at September 30:

| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Land                                       |       | $        | 20         |     | $          | 169 |   |
| Buildings and  leasehold improvements      |       | 1,779    |       | 2,293    |       |
| Machinery,  furniture and equipment        |       | 9,138    |       | 8,140    |       |
| Computer  equipment                        |       | 2,899    |       | 2,759    |       |
| Construction in  progress                  |       | 377      |       | 630      |       |
|                                       |       | 14,213   |       | 13,991   |       |
| Accumulated  depreciation and amortization |       | (7,160   | )          | (7,072   | )          |
|                                       |       | $        | 7,053      |     | $          | 6,919 |   |

 

We recorded depreciation expense of $1,744, $1,392, and $1,146 forthe years ended September 30, 2006, 2005 and 2004, respectively.

**6.**                 Intangibles

Intangible assets consists of thefollowing at September 30:

| ** **                | ** ** | **Useful Life** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------|------------|----------------------|------------|----------|------------|----------|------------|
| Amortizing:               |       |                 |       |     |       |     |       |
| Customer lists            |       | 9-10 years           |       | $        | 2,410      |     | $          | 1,589 |   |
| Covenants not to compete  |       | 5 years              |       | 256      |       | 112      |       |
| Other                     |       | 5 years              |       | 36       |       | 36       |       |
|                      |       |                 |       | 2,702    |       | 1,737    |       |
| Accumulated  amortization |       |                 |       | (373     | )          | (145     | )          |
|                      |       |                 |       | 2,329    |       | 1,592    |       |
| Non-Amortizing:           |       |                 |       |     |       |     |       |
| Trade names               |       |                 |       | 52       |       | 52       |       |
|                      |       |                 |       | $        | 2,381      |     | $          | 1,644 |   |

 

57

----

We recorded amortization expense of $229,$145, and $0 for the years ended September 30, 2006, 2005, and 2004,respectively. Estimated amortization expense related to intangible assets as ofSeptember 30, 2006 follows:

| ** ** | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2007       |       |       | $          | 309 |   |   |
| 2008       |       |       | 309        |   |   |
| 2009       |       |       | 309        |   |   |
| 2010       |       |       | 286        |   |   |
| 2011       |       |       | 269        |   |   |
| Thereafter |       |       | 847        |   |   |
|       |       |       | $          | 2,329 |   |   |

 

**7.**                 Line-of-Credit and Long-Term Debt

Line-of-Credit—We have a line-of-credit agreement with two lendersfor a credit facility that allows for borrowings up to $70,000. Theline-of-credit is secured by a security interest in substantially all of ourassets and terminates on June 18, 2007. Interest is due monthly at thefollowing rates: 1) LIBOR plus a margin (7.07% as of September 30, 2006),at our option; or 2) the prime rate (8.25% at September 30, 2006). Theeffective borrowing rate was the prime rate as of September 30, 2006.

The lenders also receive an unused line fee and letter of creditfee equal to 0.375% of the unused amount of the revolving credit facility. Ouroutstanding balance on this facility at September 30, 2006 and 2005 was$10,559 and $24,690, respectively. The line-of-credit contains certain restrictivefinancial covenants as well as restrictions on dividend payments and futuredebt borrowings. The credit agreement allows us to issue up to $10,000 inletters of credit. The letters of credit typically act as guarantee of paymentto certain third parties in accordance with specified terms and conditions. Wehad eleven letters of credit totaling $780 and three letters of credit totaling$300 at September 30, 2006 and 2005, respectively. There were nooutstanding borrowings on these letters of credit at September 30, 2006 or2005.

As part of the credit agreement, we were required to maintain aninterest rate swap on a minimum notional amount of $12,000 of borrowings underour revolving credit facility. On July 7, 2004 and 2003, we entered intointerest rate swap agreements for $12,000 of our line-of-credit borrowings.Under the swaps, we received interest at a floating rate based on LIBOR andpaid interest at a fixed rate of 2.49% and 1.33%, respectively. Net paymentsdue under the swaps were settled monthly and the swaps expired on July 7,2005 and 2004, respectively. We received a waiver from our lenders for therequirement to maintain an interest rate swap effective as of July 7,2005.

On January 3, 2005, we issued an unsecured non-negotiablepromissory note in the aggregate principal amount of $487 in partialconsideration for the purchase of substantially all the assets of Vetpo (SeeNote 3 “Business Acquisitions”). The note bears interest at the prime rate(8.25% and 6.75% as of  September 30,2006 and 2005, respectively), payable quarterly. The principal of the note ispayable in five equal annual installments, beginning January 1, 2006.Remaining principal balance was $389 and $487 at September 30, 2006 and2005, respectively.

**8.**                 Redeemable Preferred Stock

We authorized 30,000 shares of $1 par value Series Apreferred stock, with 26,786 shares issued and outstanding at September 30,2004. The redeemable preferred stock was subject to mandatory redemption on June 18,2012 and had a liquidation preference of $1,000 per share (plus accumulated,accrued and unpaid dividends). The holders of redeemable preferred stock wereentitled to a cumulative 13% annual dividend based on the liquidationpreference. We had the right to redeem any outstanding shares at any 

58

----

time but all shares were required to beredeemed no later than June 18, 2012. In August 2005, we used aportion of the proceeds from our initial public offering (See Note 9 “CommonStock and Stock Options”) to redeem all of the redeemable preferred stock.

**9.**                 Common Stock and Stock Options

*Initial Public Offering*

On August 3, 2005, wecompleted our initial public offering in which we sold an aggregate of4,983,334 shares (including the exercise of the underwriters’ over-allotmentoption) of our common stock at a price of $17 per share. We received netproceeds of $77,159 after deducting the underwriting discounts and offeringexpenses. We used the net proceeds to redeem all of our Series A preferredstock for approximately $39,789 and to repay approximately $37,370 ofborrowings outstanding on our revolving credit facility under our amendedcredit agreement.

*Follow-on Offering*

On July 25, 2006 weissued 869,565 shares of common stock and certain selling stockholders sold2,117,814 shares of common stock which were subsequently sold to the public for$32.25 per share in our follow-on offering. We received net proceeds of approximately$26,100 after deducting the underwriting discounts and offering expenses. Wedid not receive any of the proceeds from the shares of common stock sold by theselling stockholders. Under the terms of the underwriting agreement, we and theselling stockholders granted the underwriters a thirty day over-allotmentoption to purchase an additional 130,435 shares of common stock from us and317,671 shares from the selling stockholders on the same terms as the originaloffering. On July 28, 2006, the underwriters exercised a portion of theirover-allotment option that required us to sell an additional 39,281 shares fornet proceeds of approximately $1,200 after deducting the underwritingdiscounts, and the selling stockholders to sell to the underwriters anadditional 95,669 shares. This transaction was completed on August 2, 2006.We used the net proceeds from these transactions to repay borrowings on ourrevolving credit facility under the amended credit agreement and for generalcorporate purposes.

*2002 Stock Plan*

We have a 2002 Stock Plan (the “2002 Plan”) to provide ourdirectors, executives and other key employees with additional incentives byallowing them to acquire an ownership interest in us and, as a result,encouraging them to contribute to our success. At September 30, 2006 and2005 we had 507,688 shares of our common stock reserved for issuance under the2002 Plan. The options granted under the 2002 Plan are nonqualified stockoptions that have an exercise price per share equal to fair market value of thecommon stock at the time of grant. The term of each option is determined by ourboard of directors or by a designated committee of the board. The term of anyoption may not exceed ten years from the date of grant. In 2003, we granted543,951 nonqualified stock options with an exercise price of $0.18 per shareunder the 2002 Plan. The stock options generally lapse ten years after issuanceor 120 days after the option holder ceases to be an employee depending upon thecause of termination. The options vest in various amounts over three tofive-year periods beginning upon the achievement of annual financial targets asestablished by the option agreement beginning with the year ended September 30,2002 and ending with the year ended September 30, 2006. All unvestedoptions as of June 18, 2009 become fully vested if the option holder isemployed with us on such date. Shares issued upon exercise of options grantedunder the 2002 Plan had a repurchase right, which expired in August 2005in connection with our initial public offering. Unvested options for which theannual financial targets had been achieved became fully vested upon the completionof our initial public offering in August 2005. In fiscal year 2005, nooptions were granted under the 2002 Plan; 36,267 options were exercised and60,436 were forfeited. In 2006, no options were granted, exercised, orforfeited under the 2002 Plan. At September 30, 2006 and 2005 we hadoutstanding 447,248 stock options under the 2002 Plan with 278,024 and 253,848 vestedand exercisable at September 30, 2006 and 2005, respectively.

59

----

*2005 Stock Plan*

In July 2005,we adopted the 2005 Stock-Based Award and Incentive Compensation Plan (the “2005Plan”). Under the 2005 Plan, we may offer restricted shares of our common stockand grant options to purchase shares of our common stock to selected employees.The purpose of the 2005 Plan is to promote our long-term financial success byattracting, retaining and rewarding eligible participants. At September 30,2006 and 2005 we had 1,166,990 and 1,198,590 shares, respectively, of ourcommon stock available for issuance under the 2005 Plan.

The 2005 Planpermits us to grant stock options (both incentive stock options and non-qualifiedstock options), restricted stock and deferred stock. The compensation committeewill determine the number and type of stock-based awards to each participant,the exercise price of each award, the duration of the award (not to exceed tenyears), vesting provisions and all other terms and conditions of such award inindividual award agreements. The 2005 Plan provides that upon termination ofemployment with us, unless determined otherwise by the compensation committeeat the time options are granted, the exercise period for vested awards willgenerally be limited, provided that vested awards will be canceled immediately upona termination for cause or voluntary termination. The 2005 Plan provides forthe cancellation of all unvested awards upon termination of employment with us,unless determined otherwise by the compensation committee at the time awardsare granted.

The 2005 Plan provides that upon a change in control, thecompensation committee may, at its discretion:

·       fully vest any award under the 2005 Plan;

·       cancel any outstanding award in exchange for a payment in cash ofan amount equal to the excess of the change in control price over the exerciseprice of the award;

·       after giving the holder an opportunity to exercise any outstandingaward, cancel or terminate any unexercised award; or,

·       provide that any such award will be honored or assumed, or newrights substituted therefore by the new employer on a substantially similarbasis and in accordance with the terms and conditions of the 2005 Stock Plan.

During the fourth quarter of 2005, we granted 135,103nonqualified stock options with a weighted average exercise price of $18.43 anda term of ten years. The options were fully vested by September 30, 2005.

A summary of activity under the 2002 and2005 Plans are as follows:

| ** **                             | ** ** | **2006**           | ** ** | **2005**     | ** ** | **2004**           | ** ** |
|----------------------------------------|------------|--------------------|------------|--------------|------------|--------------------|------------|
| ** **                             | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                             | ** ** | ** **         | ** ** | **average**  | ** ** | ** **         | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                             | ** ** | **Number of** | ** ** | **exercise** | ** ** | **Number of** | ** ** | **exercise** | ** ** | **Number of** | ** ** | **exercise** | ** ** |
| ** **                             | ** ** | **Shares**         | ** ** | **price**    | ** ** | **Shares**         | ** ** | **price** | ** ** | **Shares** | ** ** | **price** | ** ** |
| Outstanding at  beginning of year |       |               | 580,335    |         |       |               | $          | 4.37 |   |   |   | 543,951 |   |   |   | $ | 0.18 |   |   |   | 543,951 |   |   |   | $ | 0.18 |   |   |
| Granted                                |       |               | —     |         |       |               | —     |   |   |   | 135,103 |   |   |   | 18.43 |   |   |   | — |   |   |   | — |   |   |
| Exercised                              |       |               | (31,600    | )            |       |               | 18.88      |   |   |   | (37,677 | ) |   |   | 0.81 |   |   |   | — |   |   |   | — |   |   |
| Cancelled or  expired                  |       |               | (7,840     | )            |       |               | 18.64      |   |   |   | (61,042 | ) |   |   | 0.35 |   |   |   | — |   |   |   | — |   |   |
| Outstanding at  end of year       |       |               | 540,895    |         |       |               | $          | 3.32 |   |   |   | 580,335 |   |   |   | $ | 4.37 |   |   |   | 543,951 |   |   |   | $ | 0.18 |   |   |
| Exercisable at end of  year            |       |               | 371,671    |         |       |               | $          | 4.75 |   |   |   | 386,935 |   |   |   | $ | 6.47 |   |   |   | 65,283 |   |   |   | $ | 0.18 |   |   |

 

60

----

 

| ** **                                  | ** ** | **Outstanding options** | ** ** | **Exercisable options** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **contractual**              | ** ** | **average** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                                  | ** ** | **Number of**           | ** ** | **life**                     | ** ** | **exercise** | ** ** | **Number of** | ** ** | **exercise** | ** ** |
| **Range of exercise prices** | ** ** | ** **                   | ** ** | **Shares**                   | ** ** | **(in years)** | ** ** | **price** | ** ** | **Shares** | ** ** | **price** | ** ** |
| $0.18 - $16.99                              |       |                         | 447,248    |                         |       |   | 5.7 |   |   |   | $ | 0.18 |   |   |   | 278,024 |   |   |   | $ | 0.18 |   |   |
| $17.00 - $19.99                             |       |                         | 72,387     |                         |       |   | 8.8 |   |   |   | $ | 17.04 |   |   |   | 72,387 |   |   |   | $ | 17.04 |   |   |
| $20.00 - $23.06                             |       |                         | 21,260     |                         |       |   | 9.0 |   |   |   | $ | 22.55 |   |   |   | 21,260 |   |   |   | $ | 22.55 |   |   |
|                                             |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

During the fiscal year ended September 30, 2006, we maderestricted stock grants which were insignificant to the financial statementsand shares outstanding.

**10.**          Computation Of Earnings Per Common Share *(In thousands, except per share data)*

| ** **                                       | ** ** | **2006**  | ** ** | **2005**    | ** ** | **2004**  | ** ** |
|--------------------------------------------------|------------|-----------|------------|-------------|------------|-----------|------------|
| ** **                                       | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** | **Basic** | ** ** | **Diluted** | ** ** |
| Net income                                       |       | $         | 13,836     |        | $          | 13,836    |       | $ | 4,557 |   | $ | 4,557 |   | $ | 2,524 |   | $ | 2,524 |   |
| Weighted average  common shares outstanding      |       | 10,773    |       | 10,773      |       | 5,970     |       | 5,970 |   | 5,038 |   | 5,038 |   |
| Effect of diluted  securities:                   |       |      |       |        |       |      |       |   |   |   |   |   |   |
| Contingent stock                                 |       |      |       | —      |       |      |       | 412 |   |   |   | 522 |   |
| Stock options                                    |       |      |       | 299         |       |      |       | 315 |   |   |   | 318 |   |
| Weighted average  shares outstanding             |       |      |       | 11,072      |       |      |       | 6,697 |   |   |   | 5,878 |   |
| Earnings per  share                              |       | $         | 1.28       |        | $          | 1.25      |       | $ | 0.76 |   | $ | 0.68 |   | $ | 0.50 |   | $ | 0.43 |   |
| Anti-dilutive shares  excluded from  calculation |       |      |       | —      |       |      |       | 34 |   |   |   | — |   |

 

**11.**          Income Taxes

The components of the U.S. Federal andstate income tax expense consist of the following:

| ** **       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------|------------|----------|------------|----------|------------|----------|------------|
| Current payable: |       |     |       |     |       |     |       |
| U.S. Federal     |       | $        | 7,726      |     | $          | 4,601    |       | $ | 3,268 |   |
| State            |       | 835      |       | 702      |       | 677      |       |
|             |       | 8,561    |       | 5,303    |       | 3,945    |       |
| Deferred:        |       |     |       |     |       |     |       |
| U.S. Federal     |       | (139     | )          | (168     | )          | 278      |       |
| State            |       | (26      | )          | (37      | )          | 57       |       |
|             |       | (165     | )          | (205     | )          | 335      |       |
|             |       | $        | 8,396      |     | $          | 5,098    |       | $ | 4,280 |   |

 

61

----

Our deferred taxassets and liabilities consist of the following at September 30:

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Deferred tax  assets:           |       |     |       |     |       |
| Investments                     |       | $        | 144        |     | $          | 144 |   |
| Allowance for doubtful accounts |       | 442      |       | 451      |       |
| Inventories                     |       | 251      |       | 199      |       |
| Revenue recognition             |       | 86       |       | 56       |       |
| Lease expense                   |       | 99       |       | 28       |       |
| Other                           |       | 19       |       | 68       |       |
| Total deferred tax  assets      |       | 1,041    |       | 946      |       |
| Deferred tax liabilities:       |       |     |       |     |       |
| Property and equipment          |       | (653     | )          | (786     | )          |
| Prepaid expenses                |       | (383     | )          | (316     | )          |
| Other                           |       | (8       | )          | (12      | )          |
| Total deferred  tax liabilities |       | (1,044   | )          | (1,114   | )          |
| Net deferred tax  liabilities   |       | $        | (3         | )        | $          | (168 | ) |

 

We believerealization of these deferred assets is more likely than not. Accordingly, novaluation allowance has been recorded.

Income tax expense differed from incometaxes at the U.S. federal statutory tax rate for all periods presented asfollows:

| ** **                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Taxes computed at  statutory rate                       |       | 35.0     | %          | 34.0     | %          | 34.0     | %          |
| State income  taxes (net of federal) income tax benefit |       | 2.0      |       | 4.3      |       | 7.1      |       |
| Redeemable  preferred stock dividend accretion          |       | —   |       | 14.3     |       | 21.2     |       |
| Other                                                   |       | 0.8      |       | 0.2      |       | 0.6      |       |
|                                                    |       | 37.8     | %          | 52.8     | %          | 62.9     | %          |

 

The decrease in theeffective tax rate for the year ended September 30, 2006 as compared tothe year ended September 30, 2005 was primarily attributable to theredemption of all Series A preferred stock in August 2005, whicheliminated the nondeductible accretion of dividends for 2006 as well as adecrease in the state income taxes related to the utilization of state taxcredits. The decrease in the effective rate for the year ended September 30,2005 as compared to September 30, 2004 was due to lower nondeductibleaccretion of dividends on the Series A preferred stock due to the timingof the redemption, as well as actual state income tax expense being less thanestimated due to the utilization of state tax credits.

**12.****         ****Statements of Cash Flows—Supplementaland Noncash Disclosures**

| ** **                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| *Supplemental Disclosures*                                              |       |     |       |     |       |     |       |
| Cash paid for  interest                                                 |       | $        | 1,785      |     | $          | 2,034    |       | $ | 1,719 |   |
| Cash paid for  income taxes                                             |       | 9,138    |       | 4,122    |       | 4,448    |       |
| *Noncash Activities*                                                    |       |     |       |     |       |     |       |
| Increase in the  fair value of interest rate swaps                      |       | —   |       | —   |       | 8        |       |
| Issuance of  unregistered restricted common stock for asset acquisition |       | 995      |       | —   |       | —   |       |
| Equipment  acquisitions financed with note payable                      |       | —   |       | —   |       | 945      |       |
| Equipment acquisitions  financed with accounts payable                  |       | 132      |       | 642      |       | —   |       |
|                                                                         |            |          |            |          |            |          |            |  |  |  |

 

62

----

**13.**          Commitments and Contingencies

We have operatingleases for office and distribution center space and equipment for varyingperiods. Certain leases have renewal options and require contingent paymentsfor increases, including executory costs, property taxes, insurance and certainother costs in excess of a base year amount. Total rent expense for the yearsended September 30, 2006, 2005 and 2004 were $2,377, $1,800 and $1,316,respectively.

The aggregate future noncancelable minimumrental payments on operating leases at September 30, 2006 are as follows:

| 2007       |   | $     | 2,016  |   |
|------------|--------|-------|--------|--------|
| 2008       |   | 1,859 |   |
| 2009       |   | 1,678 |   |
| 2010       |   | 1,494 |   |
| 2011       |   | 1,113 |   |
| Thereafter |   | 1,681 |   |
|       |   | $     | 9,841  |   |

 

We are not a party to anymaterial pending legal proceedings and are not aware of any claims that couldhave a material adverse effect on our financial position, results ofoperations, or cash flows.

**14.**          Related Party Transactions

On June 18,2002, we entered into a management services and consulting agreement (the “agreement”)with Bruckmann, Rosser, Sherrill & Co. LLC (“BRS”), a majorshareholder, and Agri Beef Co. (“Agri Beef”), a major shareholder. Theagreement stated that BRS would provide certain management, consulting andfinancial planning services to our board of directors and management. In August 2005,we, BRS and Agri Beef terminated the agreement for a termination fee of$1,600 to BRS and $400 to Agri Beef. BRS received $365 and $309 and AgriBeef received $91 and $77 for services performed under the agreementin 2005 and 2004, respectively.

MWI Co., our subsidiary, holds a 50% membership interest inFeeders’ Advantage that is accounted for as an investment using the equitymethod. Sales of products to Feeders’ Advantage were $34,121, $28,473 and$22,163 in 2006, 2005 and 2004, respectively. MWI Co. charged Feeders’Advantage for certain operating and administrative services of $591, $428 and$421 in 2006, 2005 and 2004, respectively. Our President and Chief ExecutiveOfficer and a member of our Board of Directors are each members of the board ofmanagers of Feeders’ Advantage.

**15.**          Employee Benefit Plans

Through March 31,2004, we, along with Feeders’ Advantage and Agri Beef Co., participated in amulti-employer defined contribution profit sharing plan with a 401(k) arrangementcovering all employees of the Company. On April 1, 2004, we, along withFeeders’ Advantage, established a new multi-employer defined contributionprofit sharing plan with a 401(k) arrangement and the account balances forall eligible employees were transferred to this plan.

To become eligiblefor the profit sharing portion of the plan, an employee must complete two yearsof service and attain the age of twenty-one. Participation is automaticbeginning the following January or July. To become eligible for the 401(k) portionof the plan, the employee must complete three-months of service and attain theage of twenty-one.

Both portions ofthe plan allow for employer matching contributions. We are required to match50% of the employee’s contribution to the 401(k) portion of the plan up to6% of the employee’s salary. Our 

63

----

combined matching contributions for the 401(k) portion of theplan were $633, $549, and $444 in 2006, 2005 and 2004, respectively. Employee’scontributions are fully vested immediately while employer contributions vestover a five-year period.

Contributions to the profit sharing portion of the Plans arediscretionary, ranging from 0 to 3%, and are approved by our Board ofDirectors. Total combined contributions for 2006, 2005 and 2004 were $677,$598, and $448, respectively. Employer contributions are fully vestedimmediately.

**16.**          Financial Instruments

*Financial Instruments—**The***following disclosure of theestimated fair value of financial instruments is made in accordance with therequirements of SFAS No. 107, *DisclosuresAbout Fair Value of Financial Instruments*. The estimated fair valueamounts have been determined by us, using available market information andappropriate valuation methodologies. However, considerable judgment is requiredin interpreting market data to develop the estimate of fair value. Accordingly,the estimates presented herein are not necessarily indicative of the amounts wecould realize in a current market exchange. The use of different marketassumptions and/or estimation methodologies may have a material effect on theestimated fair value amounts.

The carryingamounts of receivables, investments, accounts payable, long-term debt and theline-of-credit are a reasonable estimate of their fair value.

*Derivative Financial Instruments—**We* entered into interest rate swapsthat qualified as derivatives and were designated as cash flow hedges. Ourinterest rate swaps expired on July 7, 2005 and were not renewed.

**17.**          Quarterly Financial Data (Unaudited)

| ** **                                                                                     | ** ** | **Three-Months Ended**                                                                        | ** ** | ** **        | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                                                     | ** ** | **Dec. 31,**                                                                                  | ** ** | **Mar. 31,** | ** ** | **June 30,** | ** ** | **Sept. 30,** | ** ** | **Year** | ** ** |
| ** **                                                                                     | ** ** | **Dollars and shares in thousands, except per share data** | ** ** |
| **2006**                                                                                       | ** ** | ** **                                                                                         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                 |       | $                                                                                                  | 137,816    |              | $          | 143,349 |   | $ | 163,952 |   | $ | 161,077 |   | $ | 606,194 |   |
| Gross profit                                                                                   |       | 22,752                                                                                             |       | 19,928            |       | 22,911 |   | 22,535 |   | 88,126 |   |
| Operating income                                                                               |       | 7,757                                                                                              |       | 4,356             |       | 6,027 |   | 5,552 |   | 23,692 |   |
| Net income(1)                                                                                  |       | 4,439                                                                                              |       | 2,355             |       | 3,769 |   | 3,274 |   | 13,836 |   |
| Earnings per  common share—diluted(1)                                                     |       | $                                                                                                  | 0.41       |              | $          | 0.22 |   | $ | 0.35 |   | $ | 0.28 |   | $ | 1.25 |   |
| Weighted average  common shares outstanding used in the diluted earnings per share calculation |       | 10,864                                                                                             |       | 10,884            |       | 10,916 |   | 11,623 |   | 11,072 |   |
| **2005**                                                                                       | ** ** | ** **                                                                                         | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total revenues                                                                                 |       | $                                                                                                  | 108,994    |              | $          | 116,410 |   | $ | 137,987 |   | $ | 133,264 |   | $ | 496,655 |   |
| Gross profit                                                                                   |       | 16,624                                                                                             |       | 16,472            |       | 18,032 |   | 18,818 |   | 69,946 |   |
| Operating income(2)                                                                            |       | 5,268                                                                                              |       | 3,282             |       | 4,422 |   | 2,799 |   | 15,771 |   |
| Net income(2)                                                                                  |       | 1,656                                                                                              |       | 595               |       | 1,407 |   | 899 |   | 4,557 |   |
| Earnings per  common share—diluted(3)                                                     |       | $                                                                                                  | 0.28       |              | $          | 0.10 |   | $ | 0.24 |   | $ | 0.10 |   | $ | 0.68 |   |
| Weighted average common  shares outstanding used in the diluted earnings per share calculation |       | 5,882                                                                                              |       | 5,878             |       | 5,876 |   | 9,113 |   | 6,697 |   |

----

(1)          Thesums of the quarterly net income and earnings per share amounts do not agree tothe year-to-date earnings per common share amount as a result of rounding.

64

----

(2)          Operatingincome for the fourth quarter of 2005 includes a $2,000 pretax charge ($1,220after-tax charge) related to the termination of a management services andconsulting agreement.

(3)          Thesum of the quarterly earnings per share amounts does not agree to theyear-to-date earnings per share amount as a result of the issuance of 4,983 ofcommon stock in August 2005 upon the completion of the Company’s initialpublic offering.

***Item 9.****                          Changesin and Disagreements With Accountants on Accounting and Financial Disclosure.*

None.

***Item 9A.****                  Controlsand Procedures.*

Our management, including the Chief Executive Officerand the Senior Vice President and Chief Financial Officer, have evaluated theeffectiveness of the our disclosure controls and procedures (as defined in Rule 13a-15(e) ofthe Securities Exchange Act of 1934) as of September 30, 2006. Based onthis evaluation, the Chief Executive Officer and the Senior Vice President andChief Financial Officer concluded that our Company’s disclosure controls andprocedures are effective to provide reasonable assurance that information requiredto be disclosed by us in the reports that we file or submit under the ExchangeAct is recorded, processed, summarized and reported within the time periodsspecified by the Security Exchange Commission’s rules and forms.

Management’s annual report on internal control overfinancial reporting and the attestation report of our independent registeredpublic accounting firm are set forth below on this Annual Report on Form 10-K.

During the period coveredin this report, there were no changes in our internal controls over financialreporting that occurred during our most recently completed fiscal quarter thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

***Management’s Report on Internal Control Over FinancialReporting***

The management of MWI Veterinary Supply, Inc. andsubsidiaries (the “Company”) is responsible for establishing and maintainingeffective internal control over financial reporting (as such term is defined inExchange Act Rules 13a-15(f)).

There are inherent limitations in the effectiveness ofany internal control, including the possibility of human error and thecircumvention or overriding of controls. Accordingly, even effective internalcontrol can provide only reasonable assurance with respect to financialstatement preparation. Further, because of changes in conditions, theeffectiveness of internal control may vary over time.

Management assessed the effectiveness of the Company’sinternal control over financial reporting as of September 30, 2006. Thisassessment was based on criteria for effective internal control over financialreporting described in “Internal Control—Integrated Framework,” issued by theCommittee of Sponsoring Organizations of the Treadway Commission. Based on thisassessment, management believes that, as of September 30, 2006, wemaintained effective internal control over financial reporting.

Management’s assessment of the effectiveness of theCompany’s internal control over financial reporting has been audited byDeloitte & Touche LLP, independent registered public accounting firm,in accordance with the standards of the Public Company Accounting OversightBoard (United States). Their report is included herein.

65

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders ofMWI Veterinary Supply, Inc.Meridian, Idaho

We have audited management’s assessment, included inthe accompanying Management’s Report on Internal Control Over FinancialReporting, that MWI Veterinary Supply, Inc. and subsidiaries (the “Company”)maintained effective internal control over financial reporting as of September 30,2006, based on criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission. The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with the standardsof the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that theCompany maintained effective internal control over financial reporting as of September 30,2006, is fairly stated, in all material respects, based on the criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission.Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of September 30,2006, based on the criteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission.

66

----

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and consolidated financial statement schedule as of and for the yearended September 30, 2006 of the Company and our report dated November 21,2006 expressed an unqualified opinion on those consolidated financialstatements and consolidated financial statement schedule.
| /s/ DELOITTE &  TOUCHE LLP |   |
|-------------------------------------|--------|
| Boise, Idaho                        |
| November 21,  2006             |

 

67

----

***Item 9b.****                    OtherInformation*

None.

**PART III**

***Item 10.****                   Directorsand Executive Officers of the Registrant.*

The information regarding directors and nominees fordirectors of the Company, including identification of the audit committee andaudit committee financial expert, is presented under the headings “CorporateGovernance—Committees of the Board of Directors,” and “Election of Directors—NomineesFor Directors” in the Company’s definitive proxy statement for use inconnection with the 2007 Annual Meeting of Stockholders (the “Proxy Statement”)to be filed within 120 days after the end of the Company’s fiscal year ended September 30,2006. The information contained under these headings is incorporated herein byreference. Information regarding the executive officers of the Company isincluded in this Annual Report on Form 10-K under Item 1 of Part Ias permitted by Instruction 3 to Item 401(b) of Regulation S-K.

The Company has adopted acode of conduct that applies to its Chief Executive Officer and Chief FinancialOfficer. This code of conduct is available on the Company’s Web site at ***www.mwivet.com****.*If the Company makes any amendments to this code other than technical,administrative or other non-substantive amendments, or grants any waivers,including implicit waivers, from a provision of this code to the Company’sChief Executive Officer or Chief Financial Officer, the Company will disclosethe nature of the amendment or waiver, its effective date and to whom itapplies in a report on Form 8-K filed with the SEC.

***Item 11.****                   ExecutiveCompensation.*

Information concerningexecutive compensation is presented under the headings “Executive Compensation”in the Proxy Statement. Information concerning director compensation ispresented under the heading “Corporate Governance—Director Compensation” in theProxy Statement. The information contained under these headings is incorporatedherein by reference.

***Item 12.****                   SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.*

Information with respectto security ownership of certain beneficial owners and management is set forthunder the heading “Security Ownership of Certain Beneficial Owners andDirectors and Officers” in the Proxy Statement. Information with respect toequity compensation plans is set forth under the heading “Equity CompensationPlan Information” in this Annual Report on Form 10-K under Item 5 ofPart II. The information contained under these headings is incorporatedherein by reference.

***Item 13.****                   CertainRelationships and Related Transactions.*

Information concerningrelated transactions is presented under the heading “Certain Relationships andRelated Transactions” in the Proxy Statement. The information contained underthis heading is incorporated herein by reference.

***Item 14.****                   PrincipalAccountant Fees and Services.*

Information concerningprincipal accountant fees and services is presented under the heading “Ratificationof Appointment of Independent Registered Public Accountant” in the ProxyStatement. The information contained under this heading is incorporated hereinby reference.

68

----

**PART IV**

***Item 15.****                   Exhibitsand Financial Statement Schedules.*

(a)           Thefollowing documents are filed as part of this report:

1)              ConsolidatedFinancial Statements: See Index to Consolidated Financial Statements atItem 8 on page 43 of this report.

2)              Financial StatementSchedule: Schedule II—Consolidated Valuation and Qualifying Accounts

3)              Exhibitsare incorporated herein by reference or are filed with this report as set forthin the Index to Exhibits on pages 71 through 73 hereof.

**MWIVETERINARY SUPPLY, INC.SCHEDULE II—CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS(Amounts in thousands)**

| ** **                          | ** ** | **Balance at  Beginning  of Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions/  Write-offs** | ** ** | **Balance at  End of Period** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|----------------------------------------------|------------|
| *Allowance  for Doubtful Accounts*  | * *   |                                           | * *   | * *                                                  |       |                        | * *   | * *                                     |       |   | * * | * * |   |   | * * | * * |   |
| Year ended September 30, 2004  |       |                                           | $          | 544                                                       | * *   |                        |       | $                                            | 430        | * * |   |   | $ | (409 | *)* |   |   | $ | 565 | * * |   |
| Year ended September 30, 2005  |       |                                           | 565        | * *                                                  |       |                        | 978        | * *                                     |       |   | (362 | *)* |   |   | 1,181 | * * |   |
| Year ended  September 30, 2006 |       |                                           | 1,181      | * *                                                  |       |                        | 214        | * *                                     |       |   | (241 | *)* |   |   | 1,154 | * * |   |
|                                     |            |                                                |            |                                                           |            |                             |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

69

----

**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
|                               |                              | MWI VETERINARY  SUPPLY, INC.                                                 |
|-------------------------------|-----------------------------------|-----------------------------------------------------------------------------------|
|                          | By: /s/ MARY PATRICIA B. THOMPSON |
|                          | Mary Patricia B. Thompson         |
|                          |                              | *(Senior Vice President of Finance and  Administration, Chief Financial Officer)* |
| Date: November 22,  2006 |                              |                                                                              |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities indicated as of November 22, 2006.
| /s/ JAMES F. CLEARY, JR.    |   | /s/ MARY PATRICIA B. THOMPSON                 |
|----------------------------------|--------|-----------------------------------------------|
| James F.  Cleary, Jr.       |   | Mary Patricia B.  Thompson                    |
| *Director,  President and*       |   | *Senior  Vice President of Finance and*       |
| *Chief  Executive Officer*       |   | *Administration,*                             |
| *(Principal  Executive Officer)* |   | *Chief  Financial Officer*                    |
|                             |   | *(Principal  Financial Officer and Principal* |
|                             |   | *Accounting  Officer)*                        |
| /s/  KEITH E. ALESSI             |   | /s/  BRUCE C. BRUCKMANN                       |
| Keith E. Alessi *(Director)*     |   | Bruce C.  Bruckmann *(Director)*              |
| /s/  JOHN F. MCNAMARA            |   | /s/  A. CRAIG OLSON                           |
| John F. McNamara *(Director)*    |   | A. Craig Olson *(Director)*                   |
| /s/  ROBERT N. REBHOLTZ          |   | /s/  WILLIAM J. ROBISON                       |
| Robert N.  Rebholtz *(Director)* |   | William J.  Robison *(Director)*              |

 

70

----

**Index to Exhibits**

**Filedwith the Annual Reporton Form 10-K for theYear Ended September 30, 2006**

| Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                | ** ** | **Description** |
|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1    |       | Form of Amended and  Restated Certificate of Incorporation of MWI Veterinary Supply, Inc.,  incorporated herein by reference to Exhibit 3.1 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                      |
| 3.2    |       | Form of  Amended and Restated Bylaws of MWI Veterinary Supply, Inc., incorporated  herein by reference to Exhibit 3.2 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).                                                                                                                       |
| 4.1    |       | Form of MWI  Veterinary Supply, Inc. common stock certificate, incorporated herein by  reference to Exhibit 4.1 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                                                                                                                             |
| 4.2    |       | Registration Rights  Agreement dated as of June 18, 2002 by and between MWI  Holdings, Inc., Bruckmann, Rosser, Sherrill & Co. II, L.P.,  Agri Beef Co. and the other parties thereto, incorporated herein by reference  to Exhibit 4.3 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264). |
| 4.3    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Cleary, incorporated herein by  reference to Exhibit 4.4 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                             |
| 4.4    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and Jeff Danielson, incorporated herein by  reference to Exhibit 4.5 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                           |
| 4.5    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Hay, incorporated herein by reference  to Exhibit 4.6 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).*                                                                |
| 4.6    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and James Ross, incorporated herein by reference  to Exhibit 4.7 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).*                                                               |
| 4.7    |       | Executive Stock  Agreement dated as of June 18, 2002 by and among MWI Veterinary Supply  Co., MWI Holdings, Inc. and Mary Pat Thompson, incorporated herein by  reference to Exhibit 4.8 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).*                                                        |
| 4.8    |       | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among  MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and James F.  Cleary, Jr., incorporated herein by reference to Exhibit 4.9 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*                 |
| 4.9    |       | First Amendment  to Executive Stock Agreement dated as of May 5, 2005 by and among  MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Jeffrey  J. Danielson, incorporated herein by reference to Exhibit 4.10 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*                     |
| 4.10   |       | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among  MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and James S.  Hay, incorporated herein by reference to Exhibit 4.11 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*                        |

71

----

 

| 4.11  |   | First Amendment to  Executive Stock Agreement dated as of May 6, 2005 by and among  MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and James M.  Ross, incorporated herein by reference to Exhibit 4.12 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*                           |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.12  |   | First Amendment  to Executive Stock Agreement dated as of May 6, 2005 by and among  MWI Veterinary Supply, Inc., MWI Veterinary Supply Co. and Mary  Patricia B. Thompson, incorporated herein by reference to Exhibit 4.13  of the Company’s Registration Statement on Form S-1 (Reg  No. 333-124264).*                   |
| 10.1  |   | Credit Agreement  dated as of June 18, 2002 among the financial institutions from time to  time parties thereto, Bank of America, N.A. and MWI Veterinary Supply Co.,  incorporated herein by reference to Exhibit 10.1 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                              |
| 10.2  |   | First Amendment  to Credit Agreement dated as of August 13, 2002 by and between  MWI Veterinary Supply Co., the Lenders and Bank of America, N.A.,  incorporated herein by reference to Exhibit 10.2 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                            |
| 10.3  |   | Second Amendment  to Credit Agreement dated as of December 19, 2003 by and among  MWI Veterinary Supply Co., the Lenders and Bank of America, N.A.,  incorporated herein by reference to Exhibit 10.3 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                           |
| 10.4  |   | Third Amendment  to Credit Agreement dated as of September 1, 2004 by and between  MWI Veterinary Supply Co., the Lenders and Bank of America, N.A.,  incorporated herein by reference to Exhibit 10.4 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                          |
| 10.5  |   | Fourth Amendment  to Credit Agreement dated as of September 28, 2004 by and among  MWI Veterinary Supply Co., the Lenders and Bank of America, N.A.,  incorporated herein by reference to Exhibit 10.5 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).                                          |
| 10.6  |   | Subsidiary  Borrower Joinder Agreement dated as of December 15, 2004 by Memorial Pet  Care, Inc. and Bank of America, N.A., incorporated herein by reference  to Exhibit 10.6 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).                                                                        |
| 10.7  |   | Fifth Amendment  to Credit Agreement dated as of March 28, 2005 by and among  MWI Veterinary Supply Co. and Memorial Pet Care, Inc., the Lenders  and Bank of America, N.A., incorporated herein by reference to  Exhibit 10.14 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).                 |
| 10.8  |   | Sixth Amendment  to Credit Agreement, Consent and Waiver, dated as of April 20, 2005 by  and among MWI Veterinary Supply Co. and Memorial Pet Care, Inc., the  Lenders and Bank of America, N.A., incorporated herein by reference to  Exhibit 10.15 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264). |
| 10.9  |   | Note in the amount of  $45,862,069 from MWI Veterinary Supply Co. and Memorial Pet Care, Inc.  to Bank of America, N.A. dated December 15, 2004, incorporated herein by  reference to Exhibit 10.9 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                                              |
| 10.10 |   | Note in the  amount of $24,137,931 from MWI Veterinary Supply Co. and Memorial Pet  Care, Inc. to General Electric Capital Corporation dated  December 15, 2004, incorporated herein by reference to  Exhibit 10.10 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).                                  |

72

----

 

| 10.11 |   | 2002 Stock Option Plan,  incorporated herein by reference to Exhibit 10.11 of the Company’s  Registration Statement on Form S-1 (Reg No. 333-124264).*                                                                                                                                                                                 |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Lease Agreement  dated June 20, 2003 between Rafanelli and Nahas and MWI Veterinary  Supply Co., incorporated herein by reference to Exhibit 10.13 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                     |
| 10.13 |   | Ethical  Distribution Agreement dated as of January 1, 2004 by and between Fort  Dodge Animal Health and MWI Veterinary Supply Co., as amended, incorporated  herein by reference to Exhibit 10.16 of the Company’s Registration  Statement on Form S-1 (Reg No. 333-124264).                                                |
| 10.14 |   | Livestock  Products Agreement effective as of January 1, 2005 by and between  Pfizer Inc. and MWI Veterinary Supply Co., incorporated herein by  reference to Exhibit 10.17 of the Company’s Registration Statement on  Form S-1 (Reg No. 333-124264).                                                                       |
| 10.15 |   | Termination of  Management and Consulting Services Agreement dated as of June 3, 2005  between MWI Veterinary Supply Co., Bruckmann, Rosser, Sherrill &  Co., L.L.C. and Agri Beef Co., incorporated herein by reference to  Exhibit 10.18 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).    |
| 10.16 |   | Agreement for  Product Purchases dated as of June 30, 2005 by and between MWI  Veterinary Supply Co. and Medical Management International, Inc., dba  Banfield, The Pet Hospital®, incorporated herein by reference to  Exhibit 10.19 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).†  |
| 10.17 |   | Agreement for  Logistics Services dated as of June 30, 2005 by and between MWI  Veterinary Supply Co. and Medical Management International, Inc., dba  Banfield, The Pet Hospital®, incorporated herein by reference to  Exhibit 10.20 of the Company’s Registration Statement on Form S-1  (Reg No. 333-124264).† |
| 10.18 |   | MWI Veterinary  Supply, Inc. 2005 Stock-Based Incentive Compensation Plan, adopted  July 27, 2005, incorporated herein by reference to Exhibit 10.21 of  the Company’s Registration Statement on Form S-1 (Reg No. 333-124264).*                                                                                             |
| 10.19 |   | Form of  Option Letter, incorporated herein by reference to Exhibit 10.22 of the  Company’s Registration Statement on Form S-1 (Reg No. 333-124264).                                                                                                                                                                              |
| 21.1  |   | Subsidiaries of  MWI Veterinary Supply, Inc.                                                                                                                                                                                                                                                                                                          |
| 23    |   | Consent of  Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                |
| 31.1  |   | Certification of  the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                             |
| 31.2  |   | Certification of  the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                             |
| 32    |   | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                        |

----

*                    Identifiesmanagement contracts or compensatory plans or arrangements required to be filedas an exhibit hereto.

†                    Certainportions of the exhibit have been omitted pursuant to a confidential treatmentrequest submitted to and approved by the SEC.

73

----